Mortgage insurance is a term you may hear quite frequently in real estate. It is also referred to as private mortgage insurance (PMI). Whether you’re a mortgage lender or a real estate buyer, mortgage insurance is something you need to understand because it is often a part of real estate transactions.
If you’re not sure what mortgage insurance is and whether or not you need it, here’s a general overview of the concept and the purpose behind it.
Mortgage Insurance Explained
Mortgage insurance is designed to protect the lender in case of a default mortgage. In other words, if the buyer requires a loan to purchase real estate and fails to make payments on time or not at all, mortgage insurance offers financial assistance to the lender to cover their losses.
A mortgage lender loans money to a buyer to purchase a home or a commercial property. If less than a 20% down payment is made at the time of purchase, the lender is accepting a great deal of financial risk. Mortgage insurance helps to minimize the financial risk for mortgage lenders.
Who Benefits From Mortgage Insurance?
The primary benefactor of a mortgage insurance policy is the lender. Mortgage insurance is paid to the lender if the borrower fails to pay back the amount that is owed to the lender. When a property is in foreclosure, the lender can eventually sell the property to recoup some of the loan amount. However, mortgage loans include a great deal of fees as well as interest, and sale of the property does not always cover the full amount of the loan. Mortgage insurance helps minimize the losses the lender may suffer in a default loan.
Who Pays For Mortgage Insurance?
In most cases the borrower must pay for mortgage insurance. The lender is the one assuming the most financial risk, which is why they will require the borrower to pay for the insurance. The responsibility for paying back the loan is on the borrower, not the lender.
Are There Any Benefits for the Borrower?
Although the borrower may have to pay for mortgage insurance, it can mean that the loan will be approved when it may not have been without insurance. The borrower may have been declined for a loan due to the risks associated with the transaction if not for mortgage insurance.
If a borrower does not have at least 20% of the total cost of the property to make a down payment, mortgage insurance is a more affordable option. The cost of mortgage insurance is typically included as a portion of the monthly loan payments on the property.
Who Provides Mortgage Insurance?
Mortgage insurance is sometimes called private mortgage insurance because it is provided by a private insurance company. Lenders often work directly with certain insurance providers and may require the borrower to purchase a policy from one of their business partners in order to qualify for the loan.
How Long Does Mortgage Insurance Have to Be Paid?
Once the borrower has paid 20% of the total balance of the mortgage, they can request to drop the mortgage insurance. If the request is not made by the borrower, the mortgage insurance policy is often dropped automatically once 22% of the balance is paid off.
Roach & Lin, P.C. is a law firm in New York City specializing in the representation of default mortgage servicers. Our legal services include foreclosure, bankruptcy, evictions, REO sales, loss Mitigation, and litigation.