Mortgage insurance
Mortgage insurance refers to a insurance policy
that guarantees repayment of a mortgage loan
in the event of death or, possibly, disability
of the mortgagor. It can also refer to protection
for the lender in the event of default, usually
covering a portion of the amount borrowed.
For example, Mr. Smith obtains a mortgage loan
and, for an additional monthly premium, purchases
mortgage insurance. To obtain a mortgage loan
insured by the Federal Housing Administration,
Mr. Smith must pay a mortgage insurance premium
(MIP) equal to 2.25 percent of the loan amount.
Depending on the loan-to-value ratio, there
may be a monthly premium as well. Should Mr.
Smith die before loan maturity, the policy will
pay the remaining balance of the loan. This
protects Mr. Smith's survivors from losing the
property because of inability to continue the
loan payments and also protects the mortgagee.
Types of Mortgage Insurance
Private Mortgage Insurance (PMI) is default
insurance on conventional loans, provided by
private insurance companies. The Homeowners
Protection Act of 1998 allows PMI to be canceled
when the amount owed reaches a certain level,
particularly when the debt is less than 80 percent
of the home's value, and automatically when
the loan principal is less than 78 percent of
its original cost. Mortgagee's Title Insurance
is a policy that protects the lender from future
claims to ownership of the mortgaged property.
Generally required by the lender as a condition
of making a mortgage. In the event of a successful
ownership claim from someone other than the
mortgagor, the insurance company compensates
the lender for any consequent loses. Mortgagor's
Title Insurance is a policy protecting the buyer/
owner of real property from successful claims
of ownership interest to the property. The coverage
usually is supplemental to a Mortgagee's Title
Insurance policy, and the premium is customarily
paid by the buyer.
