Mortgage insurance is an insurance policy designed to protect a mortgage lender or titleholder in the event that a borrower defaults on payments, passes away, or is otherwise unable to meet the mortgage obligations. This type of insurance can be classified into private mortgage insurance (PMI), qualified mortgage insurance premium (MIP) insurance, or mortgage title insurance. All forms of mortgage insurance aim to safeguard the lender or property holder against specific losses.
Key Takeaways
- Mortgage insurance protects a lender or titleholder from losses if the borrower defaults on payments or experiences other qualifying adverse events.
- It includes private mortgage insurance, qualified mortgage insurance premium, and mortgage title insurance.
- Mortgage life insurance, often confused with mortgage insurance, protects heirs if the borrower dies while mortgage payments are still outstanding.
How Mortgage Insurance Works
Mortgage insurance can either be paid monthly as part of a pay-as-you-go premium or as a lump-sum at the time of the mortgage origination. Homeowners who are required to have PMI due to an 80% loan-to-value ratio can request cancellation of the policy once they have paid off at least 20% of the principal balance.
Types of Mortgage Insurance
Private Mortgage Insurance (PMI)
PMI is required for conventional mortgage loans when the borrower can’t make a down payment of at least 20%. PMI is designed to protect the lender rather than the borrower and is arranged through private insurance companies.
Qualified Mortgage Insurance Premium (MIP)
For U.S. Federal Housing Administration (FHA)-backed mortgages, a qualified mortgage insurance premium must be paid, protecting the lender similarly to PMI. Unlike PMI, MIPs are mandatory for everyone with an FHA mortgage, regardless of the down payment size.
Mortgage Title Insurance
Mortgage title insurance offers protection against losses if a sale is invalidated due to issues with the title. This insurance covers situations where, during the sale, it is revealed that someone other than the seller actually owns the property. A title search is conducted by a legal representative before the closing to identify and resolve any potential title issues.
Mortgage Protection Life Insurance
Mortgage protection life insurance is often offered when completing mortgage paperwork. This type of insurance can be declining-term (payout drops as the mortgage balance drops) or level-term (fixed payout). Depending on the policy, the beneficiary could either be the lender or the borrower’s heirs.
Duration of Mortgage Insurance Payments
For conventional loans, mortgage insurance payments are generally required until there is at least 20% equity in the home. In contrast, FHA loan holders must pay mortgage insurance premiums until the mortgage is either fully paid off or refinanced.
Coverage Provided by Mortgage Insurance
Mortgage insurance is designed to protect the mortgage lender, not the borrower. It ensures that the lender receives compensation in case the borrower cannot continue making payments, but does not prevent foreclosure on the borrower’s property.
Avoiding Mortgage Insurance Payments
To avoid private mortgage insurance, you need to put down at least 20% when taking out a new home mortgage. Some lenders may offer the option to avoid PMI by opting for a mortgage with a higher interest rate to mitigate the risk. However, certain loans like FHA loans, require payment of insurance premiums regardless of the amount of equity.
Conclusion
Mortgage insurance is crucial for protecting lenders against potential losses if you cannot meet mortgage obligations. For those taking conventional loans with less than a 20% down payment, PMI is required but can be dropped once sufficient home equity is accrued. For FHA loans, mortgage insurance premiums need to be paid for the life of the loan.
Related Terms: Underwriting, Loan-to-Value Ratio, Mortgage, Home Equity.
References
- Consumer Financial Protection Bureau. “When Can I Remove Private Mortgage Insurance (Pmi) From My Loan?”
- Consumer Financial Protection Bureau. “What Is Private Mortgage Insurance?”
- U.S. Department of Housing and Urban Development. “Single Family Upfront Mortgage Insurance Premium (MIP)”.
- Consumer Financial Protection Bureau. “What Is Lender’s Title Insurance?”
- Department of Housing and Urban Development. “Discontinuing Monthly Mortgage Insurance Premium Payments”.
