Category: Personal Mortgage
10 Mortgage Insurance Questions:
1) So what is Mortgage Insurance? 2) Who does Mortgage Insurance benefit? 3) Why do I need Mortgage Insurance? 4) How much does Mortgage Insurance cost? 5) How can I cancel Mortgage Insurance? 6) When can I cancel Mortgage Insurance? 7) Who are the major Mortgage Insurance companies? 8) Does every bank require Mortgage Insurance? 9) What changes have occurred in the Mortgage Insurance industry since the financial collapse of 2008? 10) Does the federal or state government(s) require Mortgage Insurance on government mortgages such as Fannie Mae, Freddie Mac and SONYMA?
In this article we will answer many of your Mortgage Insurance questions and refer you to more detailed articles pertaining to specific Mortgage Insurance questions.
What is Mortgage Insurance and who does it benefit?
Mortgage insurance is an insurance policy taken by a mortgage lender (typically a bank or Governmental Corporation such as Fannie Mae or Freddie Mac, or a similar State Corporation) for the benefit of the mortgage lender. Mortgage insurance premiums are paid by a borrower in the form of a direct payment to the insurance company, known as BPMI, or in the form of a premium adjustment to the borrower's interest rate, LPMI. Mortgage insurance policies insure the lender against a financial loss due to non-payment on the part of the borrower.
You may ask, "if the lender is being insured against a loss why does the borrower have to pay the insurance premiums? Shouldn't the bank pay the premium?" The answer lies in a simple theory known as risk/reward. As borrowers look to take loans on a higher percentage of the cost, or value, of a house, the risk to the bank increases. In order to reduce the risk to an acceptable level, the bank takes out an insurance policy (Mortgage Insurance) for a portion of the total loan amount. The interest rate that the bank charges on a mortgage loan is a major factor in determining the amount of profit that the bank will make on a loan. As the risk increases a bank must charge a higher rate in order to account for the risk. You may ask, "why doesn't the bank just charge a higher rate for these "riskier" loans instead of obtaining mortgage insurance?" There are actually two answers to this question:
1) Banks are regulated by several governmental agencies and the quality of the loans they make is closely monitored by these agencies. If a bank has too many "risky" loans they may be required to hold higher "reserves" (the amount of deposits that are held by a bank and not used to make loans. Funds held in reserves earn far less profit for a bank than funds used for lending purposes). Mortgage loans that are made at a higher percentage of the value of the collateral (the house) are considered riskier than loans made at lower percentages. When a loan is insured with mortgage insurance the risk is based on the net exposure to the lender after the amount of insured funds are reduced from the total loan amount. (For example, if a borrower purchases a house for $100,000 and has $5,000 as a down payment, they would have to borrower $95,000 from the lender in order to purchase the house. The lender would typically require 30% mortgage insurance, reducing the risk from $95,000 to $66,500.)
2) A lender would have to charge a much higher rate of interest in order to account for the higher risk associated with a high percentage loan (such as the one described in #1 above). The mortgage insurance premium, while considered expensive by some, is much less than the corresponding interest rate on a similar loan without mortgage insurance. the reasons for this are too complex to explain here, but may be explained in a later article on LookSeek.com.
To conclude, Mortgage insurance is an insurance policy taken by a lender to insure against loss to the lender on the riskiest portion of a mortgage loan. Mortgage insurance benefits the lender by reducing the exposure to risk of loss. Mortgage insurance benefits the borrower by allowing the lender to make a larger loan to a borrower who does not have the ability to make a larger down payment to purchase a house.
As you can see, Mortgage Insurance is a vast and complex subject. We have only answered our first two questions. For answers to the rest of our Mortgage Insurance questions you will have to continue to LookSeek.