Private MI protects lenders against loss due to foreclosure when a borrower buys a home with less than 20% down. This protection allows a lender to offer more loans, higher loan amounts, more flexible underwriting criteria and competitive interest rates. Borrowers can put the money saved on the down payment towards household items (furniture, appliances, landscaping, etc.) or home repairs. Private MI does not provide coverage in the event of a borrower's death; that is mortgage life insurance.

Private mortgage insurance began in 1957, when Max Karl, a real estate attorney in Milwaukee, Wisconsin, observed people's struggles with saving for a down payment on a home. He also understood the risks that mortgage originators faced in lending the money to potential homebuyers. He was frustrated with the process of closing loans with 100% government guarantees, which he believed was rife with red tape and bureaucracy. Why not create a private company that insured only the top portion of a mortgage, rather than 100% of the mortgage? This could be a less costly and easier way to provide low-down-payment financing to borrowers with less than a 20% down payment.

Borrowers with private MI pay monthly premiums. However, households whose adjusted gross income is $100,000 or less can deduct 100% of their MI premiums attributable to the tax year. Today, more than ever, the monthly payment that includes private MI is often competitive with, or lower than, the monthly payment with non-private MI options.

Canceling Private MI

Private MI on most loans must automatically be canceled by the lender when the loan reaches 78% of original value through amortization. Private MI can also be canceled when extra payments bring the loan below 80% of original value.