Mortgage Insurance

Submitted by frndzzz on Mon, 06/28/2021 - 20:17

What is need of Mortgage Insurance?

There is a financial insurance type that may protect both lenders and investors. Generally known as “Mortgage insurance”, this product is an insurance-policy that provides compensation for losses that are related to a mortgage loan’s default. Although it provides a comprehensive coverage, Mortgage Insurance is not so easily understandable, so a careful study is needed in order to comprehend it. This is even more urging if one intends to purchase such a policy.

Also called Mortgage Indemnity Guarantee (or in short, MIG), this policy may be either public or private. In order to get the former (the public mortgage insurance), people need to pay a so-called “mortgage insurance premium”, 

This premium is generally provided by the lender of the loan, but is paid on the behalf of the borrower. According to the loan-to-value proportion, there might be monthly charges as well.

Private mortgage insurance, on the other hand, is generally made obligatory by lenders in case mortgage down-payments are less than 20 percent. Rates that homebuyers need to pay may vary between 1.5% and 6% of the loan’s principal, and they are calculated according to certain factors such as the loan-amount that is insured, the loan-to-value (or LTV). Moreover, rates may also depend on whether it is a fixed or a variable insurance, and they are also a matter of the insured individual’s credit rating. The mortgage insurance rates can be paid either annually or monthly. However, some insurance companies offer other variations as well.

What are the advantages of purchasing Private Mortgage Insurance?

This policy protects the lender in case the borrower defaults, which otherwise would result in enormous losses. Without insurance, most of the lenders could not survive the situation of a borrower defaulting on a loan. From the other side, so from the borrower’s point of view, mortgage insurance is useful as it helps them to have access to homeownership even if they have a very small amount of money. With mortgage insurance, people are able to buy a house, by having only 3 to 5% down payment.

Traditional Mortgage Insurance (also known as “Borrower-Paid Private Mortgage Insurance” or BPMI) is a default-insurance attached to mortgage-loans. This is offered by private insurance-companies and is paid by borrowers. Traditional Mortgage Insurance allows borrowers the option of getting a mortgage without the usually needed 20 percent down-payment. This is made possible by the coverage provided to lenders by the private mortgage insurance. The process is simple: lenders have an added risk, but this risk disappears with the BPMI. Borrowers have a greater home-buying opportunity, but in turn, they are required to pay for the BPMI which protects their lenders against borrower-default.

Talking about Traditional Mortgage Insurance, it is important to remark that PMI should be cancelled if the owed amount has reached a certain predefined level. This level is calculated based on the loan balance. 

Finally, there is a rarer mortgage insurance called “Lender-Paid Private Mortgage Insurance” (or in short, LPMI). Although this is very similar to the above-mentioned policy, there is a huge difference between the two. LPMI premiums are paid by the lender to the insurance company, and the borrower may not even know about it. However, the premium-costs are built into the loan’s interest-rate charges, so basically the one who pays for this service is the borrower of the loan.

All in all, in order to prevent losses that would occur due to the borrower’s default, lenders are given the possibility to opt for a protection called Mortgage Insurance. This provides them with coverage from 20% to 70% of the loan’s value. This extra safety provided by the insurer requires a certain amount of insurance premium that is paid either by the borrower or by the mortgage-loan lender. In this latter case, however, lenders usually build the premium-amount into their interest-rates.