Its purpose is to offset losses in the case where a mortgagor is not able to repay the loan and the lender is not able to recover its costs after foreclosure and sale of the mortgaged property.
This type of insurance is usually only required if the downpayment is 20% or less of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more).
[citation needed] Sometimes lenders will require that mortgage insurance be paid for a fixed period (for example, 2 or 3 years), even if the principal reaches 80% sooner than that.
Legally, there is no obligation to allow the cancellation of MI until the loan has amortized to a 78% LTV ratio based on the original purchase price.
In some situations, the all-in cost of borrowing may be cheaper using a piggy-back than by going with a single loan that includes borrower-paid or lender-paid MI.
[3] The original law was extended in 2007 to provide for a three-year deduction, effective for mortgage contracts issued after December 31, 2006, and before January 1, 2010.
[6] Mortgage insurance is payable if the loan-to-value ratio (LTV, or LVR in Australia) is above 80%, or above 60% for low document loans.