Mortgage Insurance

Mortgage insurance 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. Mortgage life insurance guarantees repayment of a mortgage loan in the event of death or, possibly, disability of the borrower.

For example, Mr. Smith obtains a mortgage loan that exceeds 80% (the typical cut-off) of his property's value and/or sale price. Because of his limited equity, the lender requires that Mr. Smith pay for mortgage insurance that protects their institution against his default. To obtain public mortgage insurance from the Federal Housing Administration, Mr. Smith must pay a mortgage insurance premium (MIP) equal to 1.5 percent of the loan amount at closing. 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.

Private mortgage insurance

Private mortgage insurance is typically required when down payments are below 20%. Rates can range from 1.5% to 6% of the principal of the loan based upon loan factors such as the percent of the loan insured, loan-to-value (LTV), fixed or variable, and credit score. The rates may be paid annually, monthly, in some combination of the two (split premiums).

Borrower-Paid Private Mortgage Insurance
is a default insurance on mortgage loans provided by private insurance companies and paid for by borrowers. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners Protection Act of 1998 requires PMI to be canceled when the amount owed reaches a certain level, particularly when the loan balance is 78 percent of the home's purchase price. Often, BPMI can be cancelled earlier by submitting a new appraisal showing that the loan balance is less than 80% of the home's value due to appreciation (this generally requires two years of on-time payments first).

Lender-Paid Private Mortgage Insurance (LPMI)
Similar to BPMI, except that it is paid for by the lender, and the borrower is often unaware of its existence. LPMI is usually a feature of loans that claim not to require Mortgage Insurance for high LTV loans. The cost of the premium is built into the interest rate charged on the loan.
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