Understanding Mortgage Insurance

By Karen Lawson
LoanPage.com Columnist

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If you're getting a new home loan with more than an 80% loan to value ratio (LTV), your lender will likely require mortgage insurance. What is mortgage insurance, and why is it required? Homeowners who borrow more than 80% of their home's value are viewed as an increased credit risk by mortgage lenders. Mortgage insurance provides a "safety net" for your lender in the event you default on your home loan payments.

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Mortgage Insurance, Homeowners Insurance, and Mortgage Life Insurance

Mortgage insurance is typically required for a new home loan for more than 80% of the value of your home. Given today's high home prices, many homebuyers must get mortgage loans of amounts greater than 80% of their home's value. Here's how mortgage insurance works.

MI Protects Your Mortgage Lender

Recent headlines about subprime mortgage problems have shown what can happen when borrowers with high LTV loans experience problems. Worse, should property values fall, homeowners with little or no home equity can potentially owe more on their home loan than their property is worth. Homeowners facing such difficulty should contact their mortgage companies for assistance. Mortgage companies work with MI companies to help homeowners in need. If a loan is foreclosed, or otherwise liquidated at a loss, the MI company pays a claim from the mortgage company that will reduce the mortgage lender's losses.

Increasing Property Values Can Eliminate MI Requirement

The upside is that if your home appreciates to a point where your LTV ratio is less than 80%, you can ask your lender to drop the MI requirement. You will need to be proactive, as lenders typically don't volunteer to waive MI requirements.

About the Author
Karen Lawson is a freelance writer with extensive experience in mortgage banking. She holds BA and MA degrees in English from the University of Nevada, Reno.

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