Lesson 14 of 25 · 7 min
Conventional mortgage insurance, at a mechanical level
Mortgage insurance is a charge on the slice above eighty percent LTV, not a cut in the balance.
Conventional mortgage insurance is a charge for the portion of the loan that sits above a conventional 80 percent LTV. It is not a reduction in the balance. Track 1 lesson 4's haircut lowers the advance against the asset. Mortgage insurance leaves the advance high and prices the extra slice as a fee. Same geometry, other wrapper: the lender is charging for the thin cushion, not shrinking P to create one.
Same Cairn Street house: price $294,000, down $14,700, financed $279,300, LTV 95 percent. Illustrative annual mortgage insurance is 0.72 percent of the loan: $279,300 × 0.0072 = $2,010.96 a year, $167.58 a month. PI is $1,830.14. PI plus insurance is $1,830.14 + $167.58 = $1,997.72, before tax and insurance. The $279,300 is still $279,300. The $167.58 does not retire any of it.
Cancellation, the later dropping of the charge once LTV is computed at 80 percent, is a mechanical threshold. A later remaining balance over a later mark, the same ratio Track 1 lesson 6 already taught, is compared with 80 percent. When that test passes, the fee can fall away under the contract's rules. That is a description of a switch. It is not an instruction to cancel, to wait, or to act.
The 15-point gap between 95 percent LTV and 80 percent LTV is $279,300 − $235,200 = $44,100 of extra principal from lesson 13. The insurance is the monthly price of carrying that extra slice on this book. A haircut would have refused the slice. The fee accepts the slice and bills it.
The charge sits on top of a high LTV. It is not principal, it is not interest, and it is not a smaller loan. It is a fee for the thin cushion.
Key terms
- Conventional mortgage insurance
- A periodic charge on a loan whose day-one LTV sits above a conventional 80 percent. It does not reduce the balance.
- Insurance cancellation (as a mechanism)
- The later dropping of the charge once LTV is computed at 80 percent. A threshold in the contract, not an instruction.
- Haircut as a fee
- Track 1 lesson 4's withheld advance, priced instead as a monthly charge so the advance can stay high.
Worked example
The fee on the extra slice
Cairn Street Lending. Price $294,000, down $14,700, financed $279,300, LTV 95%. Illustrative annual MI 0.72 percent of the loan.
- Annual MI
- $2,010.96
- Monthly MI
- $167.58
- PI
- $1,830.14
- PI plus MI
- $1,997.72
- Extra slice above 80% LTV
- $44,100
$279,300 × 0.0072.
$2,010.96 ÷ 12.
Before tax and insurance. P is still $279,300.
$279,300 − $235,200.
The $167.58 is the monthly price of a 95 percent LTV on this book. It does not shrink the $279,300.
Check yourself
Price $228,000, 5 percent down, financed $216,600, LTV 95 percent. Illustrative annual MI 0.65 percent of the loan. PI is $1,455.62. What is monthly MI, and what is PI plus MI? Does the MI reduce the $216,600?
Mortgage insurance is a charge that sits on top of a high loan to value, the everyday version of a haircut priced as a fee rather than as a lower advance, Track 1 lesson 4's haircut in another wrapper. Open What a haircut is, and why it exists →
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.