What is Mortgage Insurance (MI)? How Does it Benefit Me?

House Puzzle

Mortgage insurance has been around since the late 1800’s. It was provided as a guarantee to mortgage investors that, in the case of default, they would be able to recover their money. Without mortgage insurance investing in mortgages was not very attractive.

As years went by data on defaulted loans (loans foreclosed) showed lenders that distressed sales or foreclosed homes seldom sold for full market price. Lenders are not in the real estate business. The value of a property is gauged by the amount of lost money that can be recovered in a reasonable amount of time. Caring for a “bank owned” property increases expenses. The taxes must be paid, insurance maintained, and basic maintenance must be done to keep a vacant property in good condition.

In order to protect against losses lenders generally require mortgage insurance if a borrower puts less than 20% down. This policy is paid for by the borrower but it protects the lender. There is no borrower protection but mortgage insurance does allow a prospective homeowner to purchase a home with a lower down payment. That is a benefit for many potential home-buyers with limited savings.

The mortgage insurance payment will generally go away once a home-buyer establishes 22% equity. This means that for every $100,000 of value the balanced owed of $78,000. Equity is gained in two ways, by paying down a mortgage over time or the value increasing. If someone wishes to use a value increase to eliminate mortgage insurance it will require a new appraisal and often a refinance of the current loan to a new loan using the higher appraised value.

Mortgage insurance has benefited many current homeowners, and will benefit many future homeowners, by allowing purchases (or refinances) with lower down payment or required equity thresholds.

 

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