Mortgage Insurance

Financial Dictionary -> Mortgages -> Mortgage Insurance

In the United States there are two main types of mortgage insurance. The first type is Lenders Mortgage Insurance or LMI in its shortened form. The second type is Mortgage Life Insurance or MLI in its shortened form.

Lenders Mortgage Insurance, sometimes known as private mortgage insurance is an insurance fee made payable to a lender in order for a borrower and lender to receive security when taking out a mortgage. The insurance is to make up for lost money if the borrower fails to make payment, defaults the loan, goes into the foreclosure process but still can't make the full payment despite selling the property. It is sometimes seen as paying collateral before it happens.

Some lenders require borrowers to take out lenders mortgage insurance period, or if the down payment amount is below 20%. Rates of insurance are around $55 per month, per $100,000 financed in the loan. Since 2007 this type of insurance has been tax deductable.

Mortgage Life Insurance is an insurance fee made payable to a lender in order to ensure the loan amount is paid back if the borrower dies or becomes disabled to the point of default before the loan term is over. This partially protects the borrower during the foreclosure process and helps to ensure the lender gets their due amount in case of a crisis.

This is just another security measure implemented by a lender in order to ensure they will come out of the loan agreement with the amount legally owed to them. Mortgage life insurance is often required if the borrower cannot make an initial 20% down payment (upfront percentage of the loan) before taking out the mortgage.

If a potential borrower has a very poor credit rating and financial history and look to be quite risk for a lender they may require them to take out insurance even if they can make a sizeable down payment to begin with.