Mortgage Insurance

                               Mortgage Insurance

 Mortgage insurance (also known as mortgage guaranty) is an insurance policy

 which compensates lenders or investors for losses due to the default of a

 mortgage loan. Mortgage insurance can be either public or private depending

 upon the insurer. The policy is also known as a mortgage indemnity guarantee

 (MIG), particularly in the UK.

  For example, Mr. Smith decides to purchase a house which costs $150,000. He

 pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-

 $15,000) mortgage. Lenders will often require mortgage insurance for mortgage

 loans which exceed 80% (the typical cut-off) of the property's sale price. Because

 of his limited equity, the lender requires that Mr. Smith pay for mortgage

 insurance that protects the lender against his default. The lender then requires

 the mortgage insurer to provide insurance coverage at, for example, 25% of the

 135,000, or $33,750, leaving the lender with an exposure of $101,250.

 The mortgage insurer will charge a premium for this coverage, which may be paid by

 either the borrower or the lender. If the borrower defaults and the property is sold

 at a loss, the insurer will cover the first $33,750 of losses. Coverages offered by

 mortgage insurers can vary from 20% to 50% and higher.

  To obtain public mortgage insurance from the Federal Housing Administration,

 Mr. Smith must pay a mortgage insurance premium (MIP) equal to 1.75 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. The United States Veterans

 Administration also offers insurance on mortgages.
 
Private Mortgage Insurance


 Private mortgage insurance is typically required when down payments are below

 20%. Rates can range from 1.5% to 6% of the principal of the loan per year

 based upon loan factors such as the percent of the loan insured, loan-to-value

 (LTV), fixed or variable, and credit score. The rates may be paid in a single lump

 sum, annually, monthly, or in some combination of the two (split premiums). In

 the U.S., payments by the borrower are tax-deductible until 2010.

  Borrower-Paid Private Mortgage Insurance (BPMI or "Traditional Mortgage

 Insurance") is a default insurance on mortgage loans provided by private

 insurance companies and paid for by borrowers. BPMI allows borrowers to obtain

 a mortgage without having to provide 20% down payment, by covering the lender

 for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners

 Protection Act of 1998 requires PMI to be canceled when the amount owed

 reaches a certain level, particularly when the loan balance is 78 percent of the

 home's purchase price. Often, BPMI can be cancelled earlier by submitting a new

appraisal showing that the loan balance is less than 80% of the home's value due

 to appreciation (this generally requires two years of on-time payments first).

 Lender-Paid Private Mortgage Insurance (LPMI) similar to BPMI, except that it is

paid for by the lender, and the borrower is often unaware of its existence. LPMI is

 usually a feature of loans that claim not to require Mortgage Insurance for high

 LTV loans. The cost of the premium is built into the interest rate charged on the
 loan.