Private mortgage insurance, also known as MI or private MI, is protection for lenders and mortgage investors against the possibility of loan default. Typically, lenders require mortgage insurance when borrowers make a down payment of less than 20 percent. The premium rate charged for mortgage insurance varies with the type of mortgage insurance program offered by the lender. The most common is a monthly premium that is calculated as a percentage of the total loan amount.

Mortgage Insurance Protects Lenders

Lenders are exposed to the risk of credit loss if borrowers are not able to make their mortgage payments. While mortgage loans today are underwritten to high standards, including a strong emphasis on borrowers’ ability to afford their loans, their ability can still be compromised by life events such as job loss or illness that can result in default. When a loan defaults, the lender can suffer a credit loss and factors such as smaller down payments will increase the risk of default and loss. For this reason, lenders obtain mortgage insurance to protect against that risk. Mortgage insurance covers a portion of the lender’s exposure on the loan and allows lenders to offer mortgage loans at competitive interest rates with the risk protection provided by mortgage insurance.