Mortgage Insurance

Definition: It is also called private mortgage insurance (PMI). Mortgage insurance is insurance that homebuyers are generally required to purchase if their down payment amount is too low. It usually is required for owner occupied family dwellings if the down payment is 20 percent or less of the purchase price of the home and land. Private mortgage insurance helps to protect the lender if the borrower cannot repay the loan.

Benefits: Private Mortgage Insurance plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.

Requirements: A new federal law, The Homeowner's Protection Act (HPA) of 1998, requires lenders or servicers to provide certain disclosures concerning Private Mortgage Insurance for loans secured by the consumer's primary residence obtained on or after July 29, 1999. The HPA also contains disclosure provisions for mortgage loans that closed before July 29, 1999. In addition, the HPA includes provisions for borrower-requested cancellation and automatic termination of Private Mortgage Insurance.

Reasons To Use: There are four main reasons to use mortgage insurance:

Private Mortgage Insurance helps people own their homes sooner.
Private Mortgage Insurance is a smarter financial option because in most cases it saves you money in the long run and allows you greater flexibility.
Private Mortgage Insurance is a safer investment, because it is backed by companies whose success is determined by homeowners' success.
Finally, it is a sounder option because neither the government nor taxpayers bear any financial risk for defaulted loans.
Private Mortgage Insurance is an insurance policy designed to protect the lender in case you do not pay back your mortgage loan. If you are unable to make a down payment of at least 20%, you will typically be required to take out private mortgage insurance.

Mortgage Insurance Premiums: It is a monthly payment -usually part of the mortgage payment - paid by a borrower for mortgage insurance. Mortgage insurance premiums are collected in a variety of ways:

As a monthly payment charged to the borrower
As a lump sum payable by the borrower at closing
Wrapped into the amount of the mortgage loan, or
Wrapped into the interest rate of the home loan

Loans Covered: Any conventional loan where the borrower makes less than a 20% down payment need to be protected by mortgage insurance. It does not matter whether the loan is a 15-year mortgage or a 30-year mortgage. It also does not matter whether the mortgage loan is an adjustable rate mortgage or a fixed-rate loan. Mortgage insurance also applies to balloon mortgages, purchases, refinance deals and virtually any low down payment mortgage loan. Other programs, such as FHA insured mortgages, contain hybrid forms of private mortgage insurance that are charged to the borrower.

Cancellation or Termination: Under HPA, you have the right to request cancellation of Private Mortgage Insurance when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Automatic Termination: Under HPA, mortgage lenders or servicers must automatically cancel Private Mortgage Insurance coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require Private Mortgage Insurance premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.

Final Termination: Under HPA, if Private Mortgage Insurance has not been cancell ed or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.