MI Basics
What is MI?

Private mortgage insurance (Private MI) is a financial guaranty business in which an insurer assumes a portion of a lender's risk in making a mortgage loan. For that risk, the insurer collects a premium from the lender, which then typically recovers the cost of the premium from the borrower. The "risk" in private mortgage insurance is that a borrower will default on a loan and ultimately result in the insurer having to pay a claim.

Here's how it generally works (see illustrations at right):

• A borrower buying a $150,000 home makes a 10%, or $15,000, down payment.
• The lender then obtains private MI on the borrower's $135,000 mortgage, reducing its exposure to loss from $135,000 to $101,250.
• The private MI covers the top portion of the mortgage — usually the top 25% to 30%. In this case, the MI will absorb 25%, or $33,750, of any ultimate loss to the lender.