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Mortgage Protection Insurance (MPI) is insurance that the borrower is required to purchase to protect the lender. If he cannot make his payments, then the MPI benefits the lender by paying off the note. The lenders require anyone not making the minimum down payment on the property to purchase the insurance. Generally it is 20%, but some loans do not require as much down, but still require the insurance.

The mortgage insurance benefit is not strictly limited to the lender. The borrower receives a benefit albeit indirectly. With the offering of PMI the borrower is able to obtain a loan on a home that would have been out of his reach financially if not for the insurance. There are ways to avoid paying PMI without making the down payment the lender wants. The borrower can try to qualify for a loan known as a piggy back loan. This is a loan for the property that is broken into two segments. The original loan is for 80% and another loan to make up the difference in percentage down. For example: You have 15% down payment on the property. You can apply for a loan for 5% of the value of the home. You would apply the proceeds of the 5% loan to the down payment. You would essentially have two mortgage payments, but you would meet the 20% down requirement to avoid purchasing PMI.
Another way to treat the PMI is to ask the lender to include it in the finance amount of the loan. The lender will do this but will increase the interest rate on the note to compensate. If you do this, you will have to refinance the property to remove the PMI premiums. When you have 20% invested in the property by remodeling, increase in home value over time, or have paid for enough years to reach the equity amount then you can make application to the lender to drop the PMI. Most home owners are no longer using this option because effective the 2007 tax year, Congress made insurance premiums for PMI tax deductible.

You need to study your financial situation in depth, get the counsel of financial advisors, or talk with your accountant to determine your wisest course of action. PMI is an advantage in helping you to get into your own home sooner than if you had to save up the down payment. If you rent you lose the investment dollars each month and your dream home will continue to appreciate in value. You will not be able to enjoy the appreciation without owning the home. See if there are options for investing the money that you do not put down on the house above the minimum required to get the loan. PMI lowers the investment percentage freeing up your funds for other purposes.

Let’s look at the history of PMI before we conclude this article. The ‘Review of Industrial Organization’ published a report stating that PMI dates back to the late 1800’s in the United States. New York, in 1904, was the first state to pass legislation dealing with PMI. In 1956 Minnesota chartered the first PMI Company after the war. The Roaring Twenties and WWI saw an increase in the industry until the Great Depression came and the industry was almost destroyed. Defaults went ‘off the charts’ as unemployment soared to 25% and the unemployed could no longer keep the payments current on their homes. After WWII the GI Bill and Veteran’s Administration (VA) loans made mortgages affordable for returning soldiers.

When you look at the history you can begin to understand how PMI has helped increase the housing industry by enabling more people to qualify for home ownership. The lender is not at risk because PMI steps in to pay the loan if the borrower cannot. This encourages the lender to lend more to greater numbers of people. The more activity in the industry, the lower the percentage rates for interest, and the more money flows into the coffers. There is more construction of homes as the demand for housing increases. A lot of jobs are in the industry overall.

PMI has allowed lenders to risk more by attracting borrowers from lower income and riskier credit history. Even though the borrower is paying for the coverage that benefits the lender, you can see from reading the history of PMI that the benefits are far reaching when taking into consideration all the impact the PMI has had on the industry. Just because you default on the note and PMI covers the lender you may still have a liability for any part of the mortgage that PMI did not cover. You should have a goal of getting 20% invested in your property as soon as possible so that PMI can be dropped and the amount you pay for premiums can be invested elsewhere.