What is mortgage insurance and what does it cover?

Mortgage insurance (also known as mortgage guarantee and home -loan insurance )is an insurance policy which compensates lenders or investors for losses due to the default of a loan. mortgage insurance can be either public or private depending upon the insurer.

Mortgage insurance is generally required on conventional loans when you purchase with less than a 20% equity based on the appraised value mortgage protection insurance, unlike pml , protects your as a borrower .this insurance typically covers your mortgage payment for a certain period of time if you lose your job or become disabled, or it pays it off when you die.

Two basic types of mortgage insurance
  • Borrower paid mi
  • Lender paid mi
1. Borrower paid
you to pay this as a part of your monthly payment each month .the
amount of the payment depends on how much equity you have.
less equity = higher payment

2. Lender paid mi
you take a higher interest rate so that the lender can pay for the
mortgage insurance up front. you don't make an additional payment
each month, but you are stuck with the higher rate forever.

Removing mortgage insurance

3. Only applies to borrower paid( BPMI)

Requirements are set by the homeowner's protection act of 1998.

4. Two ways to remove per the Homeowners Protection Act

Automatic Removal -happens when you pay the loan down to
78% of the original sales price (purchase) or appraised value (refinance ).
The 78% must be reached based on the original amortization schedule i .e.
you can not make additional principal payments speed up the process

5. Borrower initiated Removal-you can make additional principal payments

To drop the loan to value down to 80% of the original sales price (purchase) or appraised value (refinance)
  • caveats for both techniques
  • you must be current on the loan
  • you must have a good payment history
A Third option outside the scope of the HPA laws
  • you pay for an independent appraisal
  • if that appraisal shows that you have a loan to value of less
than 80% you can request removal of mi in writing and supplying the appraisal
Note that your lender is not legally required to remove the mortgage insurance in this case, however , they may agree to
  • if they refuse to remove it, consider refinancing to remove it.
  • note that you will NOT be able to use the some appraisal when
  • you refinance due to current rules on appraiser.
  • generally, your lender will want you to make payment for 2 years prior to
  • removing the mi.