Mortgage guaranty insurance (MGI) is designed to protect lenders, not borrowers, from financial losses if a borrower defaults on a home loan. Most commonly, lenders require this insurance when the borrower makes a down payment of less than 20% on a conventional mortgage. The most typical form of MGI is Private Mortgage Insurance (PMI), which is provided by private insurers.
When you put down less than 20%, lenders view the loan as riskier because there is less equity to protect against default. MGI transfers some of that risk to an insurance company, which compensates the lender if a borrower fails to repay. This arrangement allows more buyers to qualify for home loans without large upfront cash.
For example, if you buy a home priced at $400,000 and only make a 10% down payment ($40,000), your lender may require MGI. At a premium rate of roughly 0.5% annually, you might pay $1,800 per year—about $150 per month—added to your mortgage payment.
Types of Mortgage Guaranty Insurance
Mortgage guaranty insurance includes:
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Private Mortgage Insurance (PMI): Applies to conventional loans. This insurance protects lenders from losses due to borrower default and is usually paid monthly alongside your mortgage. You have the right to request cancellation once your equity reaches 20%, with automatic termination at 22% equity. Learn more about Private Mortgage Insurance (PMI).
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Mortgage Insurance Premium (MIP): Applies to loans backed by the Federal Housing Administration (FHA). FHA loans charge an upfront premium, often rolled into the loan, plus annual premiums paid monthly. Unlike PMI, MIP usually lasts for the entire loan term, making it harder to cancel without refinancing into a conventional loan. Detailed info available on Mortgage Insurance Premium (MIP).
How to Cancel Mortgage Guaranty Insurance
For PMI on conventional loans: The Homeowners Protection Act gives you the right to request PMI cancellation once your loan balance drops to 80% of the home’s original appraised value. Lenders must automatically cancel PMI when your balance reaches 78%. If these conditions aren’t met, PMI must end by the midpoint of your loan term (generally 15 years for a 30-year mortgage).
For MIP on FHA loans: Mortgage insurance premiums generally last for the life of the loan, especially if your down payment was less than 10%. Refinancing to a conventional loan with sufficient equity is usually necessary to eliminate MIP.
Frequently Asked Questions
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Is mortgage guaranty insurance the same as homeowners insurance? No. Mortgage insurance protects the lender; homeowners insurance protects your property and belongings.
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Can I avoid mortgage insurance? Yes, by making a 20% or larger down payment on a conventional loan or using specific loan structures like piggyback loans, though these have their own pros and cons.
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Is mortgage insurance tax-deductible? Currently, mortgage insurance premiums are not deductible for the 2023 tax year. Tax laws can change, so consult the latest IRS guidance or a tax professional.Learn more about mortgage insurance from the Consumer Financial Protection Bureau.
By understanding mortgage guaranty insurance, you can better navigate loan options and plan for removing mortgage insurance costs when possible, ultimately saving money over your loan’s life.