Purpose of Mortgage Insurance

Mortgage insurance (MI) protects lenders when borrowers default on their mortgage loans. Default typically means failure to make payments. When a mortgage lender forecloses on a mortgage, it files a claim with the MI carrier and is paid for resulting losses up to the policy limit.

MI Required

Mortgage lenders require MI for any loan in excess of 80 percent of the home's value. If your home is worth $150,000 and you take out a mortgage of more than $120,000, you'll have to pay for MI.

Why MI

Mortgage lenders consider loan-to-value (LTV) ratios of more than 80 percent a higher risk. LTV is calculated by dividing a mortgage amount by home value. MI coverage protects lenders against foreclosure expenses.

Who Pays

Although MI coverage protects your mortgage lender, you will be required to pay for it. Lenders generally divide the monthly MI premium by 12 and add the resulting amount to your mortgage monthly payment.

Eliminate MI

It may be possible to eliminate MI if your home value increases enough or if you pay your mortgage balance down enough to provide an LTV of 80 percent or less. Contact your loan servicer for specific requirements for canceling MI coverage.

MI and Foreclosure

Depending on your state's foreclosure laws, an MI company may be permitted to collect from you any amount it pays to your lender after your mortgage is foreclosed. This is a good reason not to walk away from your mortgage loan.

References

• The Mortgage Professor: Mortgage Insurance