Mortgage insurance is an insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or is otherwise unable to meet the contractual obligations of the mortgage. Mortgage insurance can refer to private mortgage insurance (PMI), mortgage life insurance, or mortgage title insurance. What these have in common is an obligation to make the lender or property holder whole in the event of specific cases of loss.
Mortgage insurance may come with a typical pay-as-you-go premium paymen,t or it may be capitalized into a lump sum payment at the time of mortgage origination. For homeowners who are required to have PMI because of the 80 percent loan-to-value ratio rule, they can request that the insurance policy be canceled once 20 percent of the principal balance has been paid off.
Borrowers are often offered mortgage life insurance when they fill out paperwork to start a mortgage. A borrower can decline this insurance when it is offered, but you may be required to sign a series of forms and waivers, verifying your decision. The intent of this extra paperwork is to prove you understand the risks associated with having a mortgage. Mortgage life insurance can be either declining-term (the payout drops as the mortgage balance drops) or level in its payout, although the latter costs more.
Private mortgage insurance (PMI) is a type of mortgage insurance a borrower might be required to buy as a condition of a conventional mortgage loan. Like other kinds of mortgage insurance, PMI protects the lender, not the borrower. PMI is arranged by the lender and provided by private insurance companies. PMI is usually required if a borrower gets a conventional loan with a down payment of less than 20 percent. A lender might also require PMI if a borrower is refinancing with a conventional loan and equity is less than 20 percent of home value.
Mortgage title insurance protects against loss in the event a sale is later invalidated because of a problem with the title. Mortgage title insurance protects a beneficiary against losses if, at the time of the sale, it is determined that someone other than the seller owned the property. Before mortgage closing, a representative, such as a lawyer or title company employee, performs a title search. The process is designed to uncover any liens placed on the property that would prevent the owner from selling. A title search is also verifies that the real estate being sold belongs to seller. Despite a thorough search, it isn’t hard to important pieces of evidence when information is not centralized.