Mortgage
Insurance
Mortgage Life Insurance refers to an insurance
policy that
guarantees
repayment of
a mortgage
loan in the
event of
death or,
possibly,
disability
of the
mortgagor.
Private
Mortgage
Insurance (PMI)
refers to
protection
for the
lender in
the event of
default,
usually
covering a
portion of
the amount
borrowed.
There are
Government
loan
products
that also
include a
Mortgage
Insurance
Premium
(MIP),
essentially
the
government
equivalent
of PMI.
For example,
Mr. Smith
obtains a
mortgage
loan that
exceeds 80%
(the typical
cut-off) of
his
property's
value and/or
sale price.
Because of
his limited
equity, the
lender
requires
that Mr.
Smith pay
for mortgage
insurance
that
protects
their
institution
against his
default. To
obtain a
mortgage
loan insured
by the
Federal
Housing
Administration,
Mr. Smith
must pay a
mortgage
insurance
premium
(MIP) equal
to 1.5
percent of
the loan
amount at
closing.
This premium
is normally
financed by
the lender
and paid to
FHA on the
borrower's
behalf.
Depending on
the
loan-to-value
ratio, there
may be a
monthly
premium as
well.
Lenders
mortgage
insurance (LMI),
also known
as private
mortgage
insurance (PMI),
is insurance
payable to a
lender that
may be
required
when taking
out a
mortgage
loan. It is
an insurance
in the case
that the
mortgagor is
not able to
repay the
loan, and
the lender
is not able
to recover
its costs
after
foreclosing
the loan and
selling the
mortgaged
property.
The annual
cost of PMI
varies
between
0.19% and
0.9% of the
total loan
value in
most cases,
depending on
the loan
term, loan
type and
proportion
of the total
home value
that is
financed.
The LMI may
be payable
up front, or
it may be
capitalized
onto the
loan. This
type of
insurance is
usually only
required if
the
downpayment
is less than
20% of the
sales price
or appraised
value (in
other words,
if the
loan-to-value
ratio (LTV)
is 80% or
more). Once
the
principal is
reduced to
80% of
value, the
LMI is no
longer
required.
This can
occur via
the
principal
being paid
down, via
home value
appreciation,
or both.
Cancelling
mortgage
insurance
can be a
difficult
process.
Sometimes
lenders will
require that
LMI be paid
for a fixed
period (for
example, 2
or 3 years),
even if the
principal
reaches 80%
sooner than
that. The
cancellation
request must
come from
the Servicer
of the
mortgage to
the PMI
company who
issued the
insurance.
Often the
Servicer
will require
a new
appraisal to
determine
the LTV. The
cost of
mortgage
insurance
varies
considerably
based on
several
factors
which
include:
loan amount,
LTV,
occupancy
(primary,
second home,
investment
property),
documentation
provided at
loan
origination,
and most of
all, credit
score.
If a
borrower has
less than
the 20% down
payment
needed to
avoid a
mortgage
insurance
requirement,
they might
be able to
make use of
a second
mortgage
(sometimes
referred to
as a
"piggy-back
loan") to
make up the
difference.
Two popular
versions of
this lending
technique
are the
so-called
80/10/10 and
80/15/5
arrangements.
Both involve
obtaining a
primary
mortgage for
80% LTV. An
80/10/10
program uses
a 10% LTV
second
mortgage
with a 10%
down
payment, and
an 80/15/5
program uses
a 15% LTV
second
mortgage
with a 5%
down
payment.
Other
combinations
of second
mortgage and
down payment
amounts
might also
be
available.
One
advantage of
using these
arrangements
is that
under United
States tax
law,
mortgage
interest
payments may
be
deductible
on the
borrower's
income
taxes,
whereas
mortgage
insurance
premiums
were not
until 2007.
back to home page
