Mortgage Insurance

Mortgage insurance also known as mortgage guaranty is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan. Mortgage insurance can be either public or private depending upon the insurer. The policy is also known as a mortgage indemnity guarantee MIG , particularly in the UK.

For example, Mr. Smith decides to purchase a house which costs 150,000. He pays 10 15,000 down payment and takes out a 135,000 150,000- 15,000 mortgage. Lenders will often require mortgage insurance for mortgage loans which exceed 80 the typical cut-off of the property's sale price. Because of his limited equity, the lender requires that Mr. Smith pay for mortgage insurance that protects the lender against his default. The lender then requires the mortgage insurer to provide insurance coverage at, for example, 25 of the 135,000, or 33,750, leaving the lender with an exposure of 101,250. 1 The mortgage insurer will charge a premium for this coverage, which may be paid by either the borrower or the lender. If the borrower defaults and the property is sold at a loss, the insurer will cover the first 33,750 of losses. Coverages offered by mortgage insurers can vary from 20 to 50 and higher.

To obtain public mortgage insurance from the Federal Housing Administration, Mr. Smith must pay a mortgage insurance premium MIP equal to 1.75 percent of the loan amount at closing. This premium is normally financed by the lender and paid to FHA on the borrower's behalf. Depending on the loan-to-value ratio, there may be a monthly premium as well. The United States Veterans Administration also offers insurance on mortgages.

Private mortgage insurance is typically required when down payments are below 20 . Rates can range from 1.5 to 6 of the principal of the loan per year based upon loan factors such as the percent of the loan insured, loan-to-value LTV , fixed or variable, and credit score. 3 The rates may be paid in a single lump sum, annually, monthly, or in some combination of the two split premiums . In the U.S., payments by the borrower are tax-deductible until 2010.

Mortgage insurance began in the United States in the 1880s, and the first law on it was passed in New York in 1904. The industry grew in response to the 1920s real estate bubble and was "entirely bankrupted" after the Great Depression. The bankruptcy was related to the industry's involvement in "mortgage pools", an early practice similar to mortgage securitization. The federal government began insuring mortgages in 1934 through the Federal Housing Administration and Veteran's Administration, but after the Great Depression no private mortgage insurance was authorized in the United States until 1956, when Wisconsin passed a law allowing the first post-Depression insurer, Mortgage Guaranty Insurance Corporation, to be chartered. This was followed by a California law in 1961 which would become the standard for other states' mortgage insurance laws. Eventually the National Association of Insurance Commissioners created a model law.