Cedar Valley Realtor

Mortgage insurance

Mortgage insurance is an insurance policy designed to protect the mortgagee (lender) from any default by the mortgagor (borrower). It is used commonly in loans with a loan-to-value ratio over 80%, and employed in the event of foreclosure and repossession.

This policy is typically paid for by the borrower as a component to final nominal (note) rate, or in one lump sum up front, or as a separate and itemized component of monthly mortgage payment. In the last case, mortgage insurance can be dropped when the lender informs the borrower, or its subsequent assigns, that the property has appreciated, the loan has been paid down, or any combination of both to relegate the loan-to-value under 80%. In the event of repossession, banks, investors, etc. must resort to selling the property to recoup their original investment (the money lent), and are able to dispose of hard assets (such as real estate) more quickly by reductions in price. Therefore, the mortgage insurance acts as a hedge should the repossessing authority recover less than full and fair market value for any hard asset. Mortgage insurance (also known as mortgage guarantee) 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, suppose Ms Smith decides to purchase a house which costs $150,000. She pays 10% ($15,000) down payment and takes out a $135,000 ($150,000-$15,000) mortgage on the remaining 90%. Lenders will often require mortg ge insurance for mortgage loans which exceed 80% (the typical cut-off) of the property's sale price. Because of her limited equity, the lender requires that Ms Smith pay for mortgage insurance that protects the lender against her default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25% of the $135,000 ($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 in the United States, Ms. Smith must pay an upfront mortgage insurance premium (UFMIP) equal to 1.75 percent of the loan amount at closing.[1] 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 is typically required when down payments are below 20%. Rates can range from 0.5% 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.[3] 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 were tax-deductible until 2010.