In light of recent revelations that mortgage insurers are
having as much difficulty maintaining the status quo as mortgage lenders, we
thought this would be a good time to explain a bit about mortgage insurance.
These are insurance policies that protect mortgage lenders
from losing out on recuperating the money they lend should their borrowers go
into default on those loans.
Many lenders require that their borro [Justify Left] wers
purchase PMI in order to receive a loan, especially when the loan amount is
over 80% of the home’s value or, put another way, when the downpayment made on
the loan is less than 20%. Thanks to mortgage insurance, it is possible for a
prospective homeowner to purchase a home with as little as just 5% down.
One of the most common types of mortgage insurance, and one
often mistaken as the sole type of mortgage insurance available, is “PMI”,
which stands for “Private Mortgage Insurance”. This type of mortgage insurance
typically covers fixed-rate, fixed-year conventional home loans.
Another type of mortgage insurance, however, is
government-backed rather than privately funded. An example of government-backed
mortgage insurance is when a borrower gets an FHA loan, that is one provided by
the Federal Housing Administration whose job it is to insure residential
mortgages made by private lenders.
It is sometimes possible for a borrower to avoid mortgage
insurance altogether, even if borrowing more than 80% of the property’s value,
by consenting to a higher interest rate.