Mortgage insurance - Mortgage your worries

Types of Mortgage Insurance

Private Mortgage Insurance (PMI) is default insurance on mortgage loans, provided by private insurance companies. PMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The Homeowners Protection Act of 1998 requires PMI to be canceled when the amount owed reaches a certain level, particularly when the loan balance is 78 percent of the home's purchase price. Often, PMI can be cancelled earlier by submitting a new appraisal showing that the loan balance is less than 80% of the home's value due to appreciation (this generally requires two years of on-time payments first)

Different terms:

Mortgagee's Title Insurance is a policy that protects the lender from future claims to ownership of the mortgaged property. Generally required by the lender as a condition of making a mortgage. In the event of a successful ownership claim from someone other than the mortgagor, the insurance company compensates the lender for any consequent losses. Mortgagor's Title Insurance is a policy protecting the buyer/ owner of real property from successful claims of ownership interest to the property. The coverage usually is supplemental to a Mortgagee's Title Insurance policy, and the premium is customarily paid by the buyer.

Lenders mortgage insurance (LMI), also known as private mortgage insurance (PMI), is insurance payable to a lender that may be required when taking out a mortgage loan. It is an insurance in the case that the mortgagor is not able to repay the loan, and the lender is not able to recover its costs after foreclosing the loan and selling the mortgaged property. The annual cost of PMI varies between 0.19% and 0.9% of the total loan value, depending on the loan term, loan type and proportion of the total home value that is financed.

The LMI may be payable up front, or it may be capitalized onto the loan. This type of insurance is usually only required if the down payment is less than 20% of the sales price or appraised value (in other words, if the loan-to-value ratio (LTV) is 80% or more). Once the principal is reduced to 80% of value, the LMI is no longer required. This can occur via the principal being paid down, via home value appreciation, or both. Canceling mortgage insurance can be a difficult process. Sometimes lenders will require that LMI be paid for a fixed period (for example, 2 or 3 years), even if the principal reaches 80% sooner than that. The cancellation request must come from the service-provider of the mortgage to the PMI company who issued the insurance. Often the service-provider will require a new appraisal to determine the LTV. The cost of mortgage insurance varies considerably based on several factors which include: loan amount, LTV, occupancy (primary, second home, investment property), documentation provided at loan origination, and most of all, credit score.

The second type of mortgage insurance is the type that usually goes by the name mortgage life insurance. Here, you're being offered the chance to buy an insurance policy that will repay your mortgage in the event of your death, disability or some incapacitating disease. This offer -- typically by mail -- often comes from your lender or an insurance company affiliated with that lender.

This type of insurance is purely voluntary and can be done without. In other words, you should take your overall financial picture into account when buying life insurance.
And the way you should do that is to have a financial planner or life insurance agent perform what's known as a "needs analysis."

All of this is not to say there isn't ever a situation in which mortgage life insurance might make sense. Since these policies are usually being mass marketed by mail, the health standards you must meet to buy one of them is usually much lower than for a regular life insurance policy.