Mortgage insurance is an insurance policy which provides safety to the money lenders or investors in the case when the mortgage loan provided by them remains unpaid. Basically it lower down the risk for lenders while giving loan to the other party. It makes borrower qualified for the loan but on the other hand it also increases the cost of your loan as the insurance amount will also be added to your monthly payment given to the lender.
Mortgage insurance is needed to be paid by the borrowers who are purchasing a home making down payment of less than 20% of the purchase price of the home. It depends on the customer whether they want public or private insurance. insurance is also known as insurance and Home loan insurance.
Mortgage insurance was started in United States in 1880s while the first rule on it was passed in 1904. No private insurance was established in United States by 1933. In 1999 the act “Homeowners Protection Act of 1998” came up as federal law in the United States. The act needed automatic termination of the mortgage insurance when the loan- to value for homes reaches upto 78%. In the United States, by 2018 the payment of private insurance was tax removed.
- PRIVATE MORTGAGE INSURANCE: PMI is needed to be used with most conventional mortgage programs when the down payment goes down than 20% of the property value. When a house is purchased or being financed using conventional mortgage, and loan-to-value goes above than 80% i.e when the equity value becomes less than 20%, then the borrower is likely to choose private insurance.
The rate of range in private mortgage insurance varies from 0.14% to 2.24% of the principal value of the purchased property. The rate is based on the percent of the loan insured, loan-to-value, the structure of principal, interest and rate, credit score. The payment of mortgage loan are paid in the form of single sum, monthly, annually or in the combination of two premiums. The most preferred way of making payment of mortgage loan is paying it monthly.
TYPES OF PRIVATE MORTGAGE INSURANCE:
- BPMI (Borrower paid private mortgage insurance): BPMI is the most preferred type of private insurance in the marketplace. The reason behind its popularity is that it provides loan to the borrower without having any need to pay 20% of the down payment along with protecting the borrower for the risk of high LTV mortgage amount. In this when the amount taken for the loan is paid or reduced to a certain level, then according to the US Homeowner Protection Act of 1998, the lender can apply for the cancellation of PMI. The PMI cancellation by investor is based on the time period for the loan taken and current position of the house purchased.
- LPMI (Lender paid private insurance): the working of LPMI is similar as of BPMI. the difference between them is that LPMI is paid by the borrower and it is calculated on the basis of interest rate of the mortgage. Lender paid private insurance claims that it does not ask for high LTV for mortgage loans. LPMI carries benefit over BPMI that the monthly payment of mortgage loan is lower in the case of LPMI. But the borrower cannot go away from it refinancing when the equity position reaches to the percent 20.
Across the United States, there are seven mortgage insurers which provide mortgage loan and helps the lender in purchasing their dream home which in either ways will not be possible. The seven mortgage insurers are:
- ARCH CAPITAL GROUP: It is a Bermuda public limited liability company.
- ESSENT GUARANTY: It is also Bermuda company.
- GENWORTH FINANCIAL: It aims of helping business and communities.
- MORTGAGE GUARANTY INSURANCE COMPANY: MGIC was inspired by Max Karl in 1957.
- OLD REPUBLIC INTERNATIONAL: Its root is in 139 subsidiaries, 27 insurance subsidiaries in 50 states and 3 Union Territories of US.
- RADIAN GUARANTY: It provides PMI mortgage insurance, risk management and other such services.
- NATIONAL MORTGAGE INSURANCE: It is one of the newest mortgage companies to provide this service.