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Mortgage Insurance Companies

What are mortgage insurance companies and what benefits do they bring to the borrower and the lender, in mortgage loan negotiations?

When applying for loan mortgages, the property is usually valued by the lender and it is this estimation that affects the size of the mortgage offer.  Generally, the mortgage offer requires the assistance of mortgage insurance companies, so that in case something happens to the property before the mortgage gets repaid, the lenders would be protected.

There are several insurance policies that are at work in mortgage loan applications.  A mortgage life insurance is an insurance policy, which guarantees the repayment of a mortgage loan in the event of the death, or disability, of the mortgagor.  Mortgage insurance companies, however, protect the interest of the lender in the event that something would happen to the property.

Some private insurance companies provide default insurance on mortgage loans.  Private insurance companies allow borrowers to get a mortgage without paying the 20% down payment. Lenders require private mortgage insurance for mortgages with down payments less than 20% because there is a risk that the borrower can default.  There is also the risk of loss to the lender because the loss is greater on loans with smaller down payments.

Mortgage insurance is protection for the lender (bank or financial institution) in the event that a borrower should withdraw their mortgage.  The premium will be paid by the borrower, while the lender receives the protection.  The benefit for the borrower is that the lender would be more willing to approve loans, which have payments smaller than 20% of the property purchase price or appraised value.  Mortgage insurance companies are not related, in any way, to life insurances – these only provide benefits to the borrower. 

When borrowers pay the mortgage insurance, lenders would have less interest in minimizing insurance costs to the borrower.  However, minimizing insurance costs rarely influences a consumer’s decision regarding the selection of a lender.  If it were the other way around, in other words, if the lenders were the ones to pay for the mortgage insurance, then they would have the power to terminate it, depending on whether or not they feel that the insurance was still necessary.

There is also, what is called, mortgagee’s title insurance.  This protects the lender from any future claims that the mortgaged property is owned by someone else.  This type of insurance is usually required by the lender, or the bank, before creating a mortgage.  It is also an assurance that no other party will acquire the mortgaged property, without its amount to being paid out first.

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