Mortgage Insurance – What Is It?
Not all mortgage loans have mortgage insurance. Only those in which the down payment is less than 20% of the purchase price.
Simply put, mortgage insurance guards the lender in the event there is a default on a mortgage. When a default occurs, the property goes into foreclosure.
The mortgage insurance premium is paid by the borrower. The insurance company is selected by the lender. In some cases, depending the type loan, the insurance continues for the life of the loan. For example, with a FHA loan, the insurance, called MIP (Mortgage Insurance Premium) is for the life of the loan. A conventional loan with less than 20% down carries PMI (Private Mortgage Insurance) for less than the life of the loan, normally for the first 5-6 years.
When a property goes into foreclosure, no one wins. The homeowner looses any equity and all the payments they made, and the insurer must pay the lenders claim. The lender has costs involved in the foreclosure process and the cost of resale of the home; the normally loose too.
Mortgage insurance is not mortgage life insurance. That is an extra optional type of insurance a borrower buys to protect their heirs against the event of their death.
If you have additional questions, please consult your attorney or lender.
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