What is Mortgage Insurance?
Mortgage insurance not to be confused with mortgage life insurance often is required by the lender to protect it against a loan default by the borrower who makes a low down payment (less than 20% of the sale price). If the borrower defaults, the mortgage insurer pays the lender its money and then seeks to recover from the borrower or forecloses on the property. The premium can be paid monthly or in one large payment. (As a corollary, make sure that your lender will cancel the insurance and/or refund unearned premiums if your home equity goes up or you sell the property.) Mortgage life insurance pays off the balance of your mortgage when you die.
As a loan officer who has over one thousand loan closings within the last five years, I have fielded numerous questions from first time home buyers, but the question most asked has to do with mortgage insurance: what is it, why do I have to have it, and how long do I have to keep paying it? Mortgage insurance is a financial guaranty for the lender that will help to reduce or eliminate a loss in the case of a default by the borrower, and it is almost universally required on loans where there is less than twenty percent equity. That means if you are purchasing a home with less than twenty percent down or refinancing to more than eighty percent of your homes value, you are going to be required to pay mortgage insurance. In other words, mortgage insurance spreads the risk between the lender and the insurance company. The next question I get about mortgage insurance is, “Why do I have to have it?” The answer to that is simple: without mortgage insurance, many lenders would not be able or wi
It’s a financial guaranty that insures lenders against loss in the event a borrower defaults on a mortgage. If the borrower defaults and the lender takes title to the property, the mortgage insurer (MGIC, for example) reduces or eliminates the loss to the lender. In effect, the mortgage insurer shares the risk of lending the money to the borrower. (Mortgage insurance should not be confused with mortgage life insurance, which provides coverage in the event of a borrower’s death, or homeowner’s insurance, which protects the homeowner from loss due to damage from fire, flood or other disaster.
Private Mortgage Insurance is designed to protect the lender in case of default by the borrower(s). PMI is required when the loan is representative of more than 80% of the value of the home. In a purchase transaction, value is determined by appraisal or sales price which ever is lower. In a refinance, value is determined by the appraisal.
