Mortgage insurance is a protection offerred to the mortgage lender and paid for by the borrower.
It is required on loan amounts that exceed 80% loan to value, which is a critical mortgage risk assessment tool and is determined by dividing the loan amount by the appraised value of the property.
The insurance covers the lender for any losses that they might incur after foreclosure, on that portion of the loan over 80% loan to value. (It also becomes an integral component in a reverse mortgage.)
The premium to be paid can be paid in advance, but most times it is added onto and becomes part of the borrowers monthly payment.
The premium is determined by the insurance company and is based on several factors, but primarily on the borrower’s credit score and the loan to value percentage. A 100% loan to value will carry a higher premium than a 90%, which would be higher than an 81% loan to value.
The mortgage insurance premium if and when added to your monthly mortgage payment should be disclosed on the Truth in Lending disclosure. In some cases, this monthly premium will stop automatically. If so, the TIL disclosure will show the exact number of payments that will include the premium and then the remainder of payments which will not. Check your TIL disclosure to know if and when your mortgage insurance premium might cease.
The Mortgage insurance premium is not tax deductible and many lenders offer an alternative. Instead of paying the insurance premium, the lender will increase the interest rate and in essence, insure themselves. In most cases, this method of paying extra interest instead of the insurance premium results in a slightly lower monthly payment and in most cases, one that is tax deductible. Ask to see this comparison.