A mortgage insurance or a private mortgage insurance is a kind of insurance that primarily benefits and protects lenders more than it does the borrowers. This insurance aims to protect the lender in case the borrower fails to pay the loan and the lender fails to recover the costs after foreclosure and property sale.
A private mortgage insurance isn't at any all a bad thing for borrowers as it is one mortgage element that allows them to get a home loan with a lower down payment. It is worth noting however that this insurance will protect your lender and your lender alone. And as the buyer of the coverage, you will pay the premiums so as to protect your lender.
This kind of insurance is usually required by lenders due to the risks of defaults associated with lower down payment mortgages. So as a whole, the one and only benefit this insurance gives the borrowers is the ability to get a loan with a low down payment.
On a related note, do not confuse private mortgage insurance with mortgage protection insurance. Although these two items sound alike, these two are very different in their goals. As mentioned, the private mortgage insurance protects your lender from your non payment. Mortgage protection insurance on the other hand, will pay off a loan in the event of a borrower's death.
Going back to the private insurance mortgage, The Homeowner's Protection Act of 1998 allows borrowers to request for the cancellation of their insurance once they reach 20% equity in their loan. Lenders are also required to cancel the insurance when 78% LTV is reached as well. Some rule exceptions may require further insurance coverage.
Furthermore, your insurance premium can also be tax deductible. Do check with a mortgage professional or tax expert to know more about your tax options.
