Mortgage Life Insurance

Mortgage insurance refers to an insurance policy that guarantees the repayment of the mortgage loan in the event of death or disability of the mortgagor. Mortgage Insurance can be of two types, namely mortgage life insurance and private mortgage insurance. While the mortgage insurance mentioned to previously refer to a mortgage life insurance

Mortgage insurance refers to an insurance policy that guarantees the repayment of the mortgage loan in the event of death or disability of the mortgagor. Mortgage Insurance can be of two types, namely mortgage life insurance and private mortgage insurance. While the mortgage insurance mentioned to previously refer to a mortgage life insurance

Private Mortgage Insurance (PMI) protects the lender of the mortgage upon default of payment of the loan. A government-sponsored equivalent of the Private Mortgage Insurance (PMI) in case of the USA is called a Mortgage Insurance Premium (MIP). The annual cost of a PMI varies between 0.9% and 0.19% of the total loan value depending on the loan term, loan amount and the nature of the loan. In the case of mortgage life insurance, the amount of coverage declines with the principal balance and in the event of the death of the borrower, the debt is fulfilled by the proceeds from the insurance policy. It pays off the mortgage loan even as the premium levels remain. Property owners who have taken mortgage on the property are eligible to apply for a mortgage life insurance. Until 2007, mortgage insurance premiums were not deductible from borrower’s income taxes whereas mortgage interest rates were inn the USA.

A MIP refers to the amount an individual has to pay as a percentage of the mortgage loan at closing to the loan insuring authority, which can be the Federal Housing Administration (FHA) in case of the USA. This payment is usually settled upon by observing the equity situation of the borrower in question and is paid as a protection for the loan providing institution. The loan provider generally pays the value or percentage to the loan insurer (in this case the FHA) on behalf of the borrower. Depending on the loan-to-value ratio, the MIP varies in percentage and can be on a monthly basis as well.

In comparison, PMI, default insurance on mortgage loans, is provided by private insurance companies who do not require 20% down payment on the amount of loan for availing a mortgage loan amount. The Homeowners Protection Act of 1998 (USA) covers the lenders for this added exposure to high loan-to-value mortgage loans by giving the facility of cancelling the PMI, particularly when the outstanding loan balance reaches 78% of the purchase price of the loan, in case of home loans.

PMI can be cancelled earlier by submitting a new appraisal showing that the amount of the loan is less than 80% of the home’s value (loan-to-value-ratio) due to the appreciated value of the property; this however requires that payments should be on time for the first two years.

There are different terminologies such as a mortgagee’s title insurance and a mortgagor’s title insurance. While a mortgagee’s title insurance protects the lender from anybody else making a claim to the mortgaged property and by paying compensations by the insurance company for any consequent losses in the event of any successful claim from any mortgagor, a mortgagor’s title insurance protects the owner of real property from successful claims of ownership interest to the property. It should be noted that this scheme is supplemental to a mortgagee’s title insurance.

A lenders’ mortgage insurance is similar to a PMI in that it protects the lender when the borrower defaults on the payment on the mortgage loan and the lender is not able to realize the full proceeds from foreclosing or appropriating the mortgaged property. It is payable up front or may be capitalized into loan. This type of insurance is generally required if the down payment is less than 20% of the sales price or appraised value of the property in question. If a borrower has less than 20% down payment needed, he can avail of a second mortgage to make up the difference.

The leading mortgage insurance companies in the world are Insura and Genpact and GE Mortgage Insurance, which help in managing the originations, credit reconciliation and mortgage underwriting for leading companies around the world. They distribute their products through banks, stock firms and brokers.