While it may seem second-nature to realtors, lenders, and others in the industry, navigating the homebuying process can be overwhelming and confusing, particularly for first-time homebuyers. It can feel like a foreign language and it’s often easy for misconceptions to take root. This includes the characterization of private mortgage insurance, which helps first-time buyers and working families become homeowners years sooner and reduces the cash due at the closing table by tens of thousands of dollars.
Prospective homebuyers deserve the facts and the full picture of what private mortgage insurance (MI) may mean for them. Looking at the facts rather than the myths will help real estate agents and the prospective homebuyers they serve make the best decisions when it comes to their home financing needs. Here’s what you might not know:
Private mortgage insurance is popular for good reason.
Nearly 40 million homeowners have used private MI to purchase or refinance a home since 1957. In fact, despite a high interest rate environment, more than 800,000 borrowers became homeowners thanks to private MI last year alone. It empowers working- and middle-class families to obtain mortgages in an affordable and sustainable way.
Private mortgage insurance helps people become homeowners sooner.
Private MI allows individuals to access homeownership with a down payment of as little as 3%, providing a path off of the sidelines and into a home years sooner than otherwise would be possible. This can be particularly helpful for first-time and working-class buyers, who may find it challenging to save for a 20% cash down payment. In 2024, approximately 65% of those who used private MI were first-time homebuyers, and nearly 35% had annual incomes below $75,000.
Think of what this means in practice. New data suggests that it could take the typical American household earning the national median household income as long as 26 years to save $82,500 in cash for a 20% down payment for a home at the 2024 median sales price of $412,500. But with private MI, coupled with a much smaller 5% down payment, that average American family could own a home of their own many years sooner and bring $61,875 less in cash to the closing table. That might be savings a family does not have, or savings intended for home renovations, a new car, or appliances. The point is, private MI helps overcome the barrier of a large cash down payment and allows working-class families to get off the homebuying sidelines years sooner.
Private mortgage insurance is not a closing cost.
Some people may hold the misconception that mortgage insurance is no different than closing costs paid at the end of the homebuying process. However, it isn’t accurate: while there are single premium products that can be paid in one lump sum, by far the most common form is borrower-paid private MI, which is paid monthly similar to mortgage principal and interest. Indeed, it means a borrower will bring tens of thousands of dollars less to the closing table.
Private mortgage insurance is a temporary cost.
Many people do not realize that private MI paid monthly by the borrower is a temporary cost. It can be canceled when a homeowner establishes 20% equity and automatically ends when 22% of the original home value is scheduled to be paid off. After that, the homeowner’s monthly payments go down accordingly, leaving more money in their pockets.
This contrasts with most loans insured by the Federal Housing Administration (FHA) for which there is both an upfront fee and a mortgage insurance premium that must be paid for the life of the loan.
The cost of private mortgage insurance has declined – unlike most other costs associated with homeownership.
While many costs associated with homeownership continue to climb, private MI premiums have declined over the past several years. Since 2017, public data show that private MI premiums have declined by 25%, while homeowners insurance, real estate taxes, and other homeownership costs have continued to go up. This trend has been driven by the industry passing on savings to homebuyers from the Tax Cuts and Jobs Act signed into law during President Trump’s first term, as well as adopting risk-based pricing engines.
Eligible homeowners will soon see even more savings thanks to a restored tax deduction.
As part of the One Big Beautiful Bill Act, Congress and President Trump reinstated and made permanent the mortgage insurance premium deduction, allowing working families to once again deduct MI premiums from their federal taxes. The MI premium deduction was claimed 44 million times in the past, representing a combined $65 billion in deductions for hardworking Americans. This reinstated deduction will apply to both private and government forms of mortgage insurance, such as those offered by FHA and VA, and put money back into the pockets of millions of working-class homeowners; in the last year that the MI premium tax deduction was available, qualifying taxpayers received an average deduction of more than $2,300.
Seth Appleton is President of U.S. Mortgage Insurers.
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners. To contact the editor responsible for this piece: zeb@hwmedia.com.
