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Monday, September 11, 2006

Basic Terminology: Mortgage Insurance (MI)

Mortgage insurance is a form of insurance that will repay a lender a certain percentage of a mortgage in the event that a borrower defaults on the loan. This is one way lenders can reduce the risk that they take on higher LTV loans where the borrower has less invested in the property.

Most prime loans require the borrower to pay mortgage insurance if the loan is for more than 80% of the property value. In general, once the loan is paid to below 80% the mortgage insurance can be removed. Sometimes appreciation in property value can also cause the outstanding loan balance to become less than 80%, though an appraisal is normally required to prove this.

Mortgage insurance premiums are typically included in the mortgage payment and the lender takes care of paying the actual insurer. There can sometimes be an origination fee for the initial setup as well.

Some mortgage companies also offer what is called Lender Paid Mortgage Insurance. This means that they have raised the interest rate slightly and are taking mortgage insurance out in their name instead of yours. Normally you would want to avoid this, as the increased rate will be with you for the life of the loan, while mortgage insurance can be removed once the principal balance is paid down.

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