Mortgage insurance is necessary in that the insurance is payable to the lender for a pool of securities that may be required when taking out a mortgage loan. In the United States, it may be known as Private Mortgage Insurance (PMI) or Lenders Mortgage Insurance (LMI). This insurances guarantee the lender that if the borrower defaults on his mortgage loan and the lender is not able to recoup its costs after the property is foreclosed upon and sold, the lender will be provided the difference so as not to lose any money.
Generally mortgage insurance is paid annually and the amount is often based on per $100,000. Still, there are several factors to consider such as the loan type, the term of the loan, the coverage amount, the total value of the home that is financed, and whether the payments are monthly, annual or made in a single payment. If the down payment is less than 20% of the sale price, the mortgage insurance is often payable up front. However, on the mortgage loan, once the borrower has paid the lender up to 80% of the value, the lender is no longer required to have mortgage insurance. This can actually occur two ways: 1) The borrower pays the mortgage down; 2) The property appreciates in value. The borrower may not even be aware of the lender’s purchase of mortgage insurance. In the United States, mortgage insurance payments became tax deductible in 2007.
In Canada, some similarities exist, such as lenders requiring mortgage insurance for loans made for homes for less than 20% of the purchase price. This is according to the Canadian Bank Act. Early in 2008, the Canadian Finance Ministry made some rules that would take effect in October 2008 for new mortgages. The federal government secures mortgages through insurance that is made available through the CMHC, Canada Mortgage and Housing Corporation. The new rules will require the borrower’s sources and level of income be evident as well as the reasonableness of property value.