Mortgage Insurance (What makes low down payment loans possible)

Simply put, Mortgage Insurance and Private Mortgage Insurance protects the mortgage lender against financial loss if a homeowner stops making mortgage payments.  If your down payment on your home is less than 20 percent of the appraised value or sale price, you must obtain mortgage insurance with your lender. This will enable you to obtain a mortgage with a lower down payment because your lender is now protected if you stop paying the loan. Mortgage Insurance charges vary depending on the size of the down payment and the loan , but they typically amount to about one-half of 1 percent of the loan, according to the Mortgage Bankers Association of America.  Mortgage insurance premiums are not tax deductible. 

When a homeowner fails to make the mortgage payments as promised, a default occurs.  If payments are not made and the default eliminated, the home goes into foreclosure.  Both the homeowner and the mortgage insurer lose in a foreclosure.  The homeowner loses the house, all of the money they have put into it, and their credit rating.  The mortgage insurer will then have to pay the lender's claim on the defaulted loan.  For this reason, it is crucial that the family buying the home can really afford it, not only at the time it is purchased, but throughout the time period of the loan. 

Although the cost of the mortgage insurance is paid by the home buyer, or borrower, the mortgage insurer works directly with the lender.   Remember that mortgage insurance is not the same as credit life insurance, also called mortgage life insurance.  This type of policy repays an outstanding mortgage balance if the person who took out the insurance policy dies.

Mortgage Insurance and RESPA

RESPA has no jurisdiction over the lender's decision to require PMI. Nor does it have any jurisdiction over the lender's decision to cancel PMI. The PMI Act (http://www.hud.gov/offices/hsg/sfh/res/respapmi.cfm ) provides information regarding cancellation of PMI.

Typically, the portion of your monthly mortgage payment that covers taxes and insurance is held in a special account by your lender known as an Escrow Account.

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