Mortgage insurance
Mortgage Insurance (also known as mortgage guarantee and home-loan insurance) 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.
In Australia, borrowers must pay Lenders Mortgage Insurance (LMI) for home loans over 80% of the purchase price.
In Singapore, it is mandatory for owners of HDB flats to have a mortgage insurance if they are using the balance in their Central Provident Fund (CPF) accounts to pay for the monthly instalment on their mortgage. However, they have the choice of selecting a mortgage insurance administered by the CPF Board or stipulated private insurers.
On the other hand, it is not mandatory for owners of private homes in Singapore to take a mortgage insurance.
Private mortgage insurance, or PMI, is typically required with most conventional (non government backed) mortgage programs when the down payment or equity position is less than 20% of the property value. In other words, if you're purchasing or refinancing a home with a conventional mortgage, if the loan-to-value (LTV) is greater than 80% (meaning you have less than a 20% equity position), it's a good bet you'll be required to carry private mortgage insurance.
PMI rates can range from 0.32% to 1.20% of the principal balance per year based on percent of the loan insured, LTV, a fixed or variable interest rate structure, and credit score. The rates may be paid in a single lump sum, annually, monthly, or in some combination of the two (split premiums). Most people pay PMI in 12 monthly installments as part of the mortgage payment.
In the United States, PMI payments by the borrower were tax-deductible until 2010.
Borrower paid private mortgage insurance, or BPMI, is the most common type of PMI in today's mortgage lending marketplace. BPMI allows borrowers to obtain a mortgage without having to provide 20% down payment, by covering the lender for the added risk of a high loan-to-value (LTV) mortgage. The US Homeowners Protection Act of 1998 allows for borrowers to request PMI cancellation when the amount owed is reduced to a certain level. The Act requires cancellation of borrower-paid mortgage insurance when a certain date is reached. This date is when the loan is scheduled to reach 78% of the original appraised value or sales price is reached, whichever is less, based on the original amortization schedule for fixed-rate loans and the current amortization schedule for adjustable-rate mortgages. BPMI can, under certain circumstances, be cancelled earlier by the servicer ordering a new appraisal showing that the loan balance is less than 80% of the home's value due to appreciation. This generally requires at least two years of on-time payments. Each investor's LTV requirements for PMI cancellation differ based on the age of the loan and current or original occupancy of the home. While the Act applies only to single family primary residences at closing, the investors Fannie Mae and Freddie Mac allow mortgage servicers to follow the same rules for secondary residences. Investment properties typically require lower LTVs.
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