Mortgage insurance is an insurance policy that safeguards a mortgage lender or title holder in the event that the borrower defaults on payments, dies, or, is otherwise unable to meet the contractual obligations of the mortgage. Mortgage insurance can refer to private mortgage insurance (PMI), mortgage life insurance, or mortgage title insurance. What these have in common is the obligation to make the lender or property holder whole in the event of specific cases of loss.
Private mortgage insurance may be called “lender’s mortgage insurance” (LMI) if the premium on a PMI policy is paid by the lender and not the borrower. This is typically done in exchange for a higher rate or fee structure on the mortgage itself.
Breaking down “Mortgage Insurance”
Mortgage insurance may come with a typical pay-as-you-go premium payment, or may be capitalized into a lump sum payment at the time the mortgage is originated. For homeowners who are required to have PMI because of the 80% loan-to-value ratio rule, they can request that the insurance policy be canceled once 20% of the principal balance has been paid off.
Mortgage life insurance can be either declining-term (the payout drops as the mortgage balance drops) or level in its payout, although the latter costs more.