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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.
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