Mortgage insurance (MI) is similar to home or auto insurance in that it insures against loss. Specifically, it protects a lender against the losses incurred if a borrower defaults on a mortgage. It is usually required when the borrower provides a down payment that is less than 20% of the home's value or sales price (whichever is less). When a loan has MI, the borrower’s monthly payment to the loan’s servicer includes a mortgage insurance premium (MIP), which is forwarded to the insurance company. Depending on the terms of your loan, you can often request to end your mortgage insurance once you have built up sufficient equity.
Loans that are considered “No MI” still have mortgage insurance involved, but the lender pays it, passing on the cost by charging higher interest rates. These loans can be good options because even though the interest rate is higher than it would be with a corresponding MI loan, the monthly payments are often lower than the combined regular loan payment and mortgage insurance payment. Additionally, the interest may be tax deductible. .
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