Buying a Los Angeles Home, What is Mortgage Insurance

There are many loan programs available to homebuyers in San Diego County and beyond. Maybe someone told you that you need a down payment of twenty percent in order to buy a home or condo. Believe it or not, there are programs available for individuals who are obtaining a loan for more than 80 percent of the purchase price. Often times, however, these loan programs are accompanied by mortgage insurance.

There are different kinds of mortgage insurance. And, if you are speaking with a mortgage lender and s/he seems to be speaking Greek, than feel free to refer to this mortgage insurance primer (unless you speak Greek, in which case please move along to another post):

Private Mortgage Insurance (PMI) As part of the loan qualifications set out by Fannie Mae and most investors, a borrower is required to pay PMI the loan amount is more than 80 percent. Private mortgage insurance is paid by the borrower, but it benefits the lender. It protects the lender against loss if a borrower defaults on a loan—kind of like a life insurance policy.

Lenders view a larger down payment as proof that a buyer is financially prepared to take on a monthly mortgage payment. The larger the down payment, the more you can demonstrate to the lender that you will not be likely to join the default statistics.

Mortgage Insurance Premium (MIP) While conventional loans have more strict underwriting guidelines, FHA-insured loans require a small amount of cash to close a loan. As a result, all borrowers must pay a MIP to insure the lender against loss if the homeowner defaults on the mortgage. While there are ways to avoid PMI with conventional loans, there is no way to avoid MIP on FHA loans because the down payment is only 3.5 percent.

Lender Paid Mortgage Insurance (LPMI) Lender Paid Mortgage Insurance is a way to avoid paying traditional mortgage insurance. In return for a small increase to your interest rate, the lender will pay the mortgage insurance for you.

In all of these situations, the lender has an insurance policy that protects them (not you) in the event that the borrower defaults and/or the property goes to foreclosure. So, yes, Mortgage Insurance is like Life Insurance. Life insurance protects the beneficiaries in the event of your untimely demise. Mortgage insurance protects the bank in the event of your untimely default on the loan.



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