The Mortgage Guaranty Insurance Corporation (MGIC) was founded in 1957 as a private business to insure home mortgage loans. Like FHA insurance, the purpose of private mortgage insurance (PMI) is to protect lenders against foreclosure losses but unlike FHA, PMI only insures the top 20% to 25% of the loan. Therefore, if a borrower can only put down 5% or 10% of the purchase price instead of 20% or 30%, the lender will require PMI.
When PMI is required, the borrower pays 1% or less when the loan is made and an annual fee of a fraction of 1%. When the loan is partially repaid, let us say down to 70% L/V), the premiums and coverage can be terminated. Therefore, it is in the borrower’s best interest to pay 20% or more as a down payment and avoid the PMI premium.