The mortgage insurance lender ( LMI ), also known as private mortgage insurance ( PMI ) in the US, is the insurance paid to the lender or trustee for a set of securities that may be required when taking a mortgage loan. This is insurance to offset the losses in cases where the mortgage can not afford to repay the loan and the lender can not recover the cost after the seizure and sale of the mortgaged property. The general fare was $ 55/mo. per $ 100,000 financed, or as high as $ 125/mo. for an ordinary $ 200,000 loan.
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Mortgage insurance in the US
The PMI annual fee varies and is expressed in terms of the total value of the loan in most cases, depending on the loan period, the type of loan, the proportion of the total value of the home financed, the sum insured, and the frequency of premium payments (monthly, yearly, or single). PMI can be paid in advance, or it may be capitalized into a loan in the case of a single premium product. This type of insurance is usually only required if the down payment is 20% or less of the selling price or the assessed value (in other words, if the lending to value (LTV) ratio is 80% or more). Once the principal is reduced to 80% of the value, PMI is often no longer required on conventional loans. This can happen through paid principals, through appreciation of home values, or both. FHA loans often require refinancing to remove PMI, even after LTV falls below 80%. The effective interest savings from PMI release can be enormous. In the case of an MI lender, the policy period may vary based on the type of coverage provided (either primary insurance, or some sort of pool insurance policy). Borrowers usually have no knowledge of any MI lender, in fact the majority of "No Needed MI" loans actually have MI paid by the lender, which is funded through the higher interest rates paid by the borrower.
Sometimes the lender will require the LMI to be paid for a fixed period (for example, 2 or 3 years), even if the principal is 80% faster than that. By law, there is no obligation to allow MI cancellation until the loan is amortized to a 78% LTV ratio (based on the original purchase price). The cancellation request must come from the KPR Provider to the PMI company issuing the insurance. Often Providers will need new assessments to determine LTV. The cost of mortgage insurance varies widely based on several factors including: loan amount, LTV, occupancy (primary, second house, investment property), documentation provided at credit origination, and most importantly, credit score.
If the borrower has less than 20% of the down payment required to avoid mortgage insurance requirements, they may be able to use a second mortgage (sometimes referred to as "piggy-back loan") to make a difference. Two popular versions of this lending technique are the so-called 80/10/10 and 80/15/5 arrangements. Both involve obtaining a primary mortgage for 80% LTV. The 80/10/10 program uses a second 10% LTV mortgage with 10% down payment, and the 80/15/5 program uses a second 15% LTV mortgage with a 5% down payment. Another combination of the second mortgage and the downpayment amount may also be available. One of the advantages of using this arrangement is that under the United States tax law, mortgage interest payments can be deducted on the borrower's income tax, while the mortgage insurance premium is not until 2007. In some situations, the cost of an all-in loan may be cheaper using piggy- back rather than going with a single loan that includes MI paid by the borrower or lender-paid.
LMI/PMI tax deductions
Mortgage insurance became a tax reduction in 2007 in the US. For some homeowners, the new law makes it cheaper to get mortgage insurance than getting a 'holding' loan. The provisions of the MI tax reduction legalized in 2006 provide a detailed deduction for the cost of personal mortgage insurance for homeowners who earn up to $ 109,000 annually.
The original law was extended in 2007 to provide a three-year, effective reduction for mortgage contracts issued after December 31, 2006, and before January 1, 2010. This does not apply to existing mortgage insurance contracts prior to the passage of the law.
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Mortgage insurance in Australia
The two major mortgage insurers in Australia are Genworth Financial and QBE LMI. Mortgage insurance can be paid if the loan-to-value ratio (LTV or LVR in Australia) is above 80%, or above 60% for low document loans. Some non-bank lenders get mortgage insurance for each loan regardless of LVR but are paid by the lender if the loan is below 80% LVR.
The LMI premium is calculated using a shear scale based on loan amount and LVR. State government stamp duty may be paid on premiums. Premiums can often be capitalized on the amount of the loan free of charge. Unlike in other countries, LMI premium once paid in Australia.
Many of Australia's larger lenders have the ability to automatically approve mortgage insurance lenders at home without the need to refer loan applications directly to the insurance company of their choice. This is known as the Delegated Underwriting Authority (TWO).
Mortgage insurance in Canada
The Bank Act governing banks as well as the provincial laws governing credit unions and caisse residents prohibit the most regulated lending institutions from providing mortgages without credit insurance if LTV is greater than 80%. The typical premium rates provided by Canada Mortgage and Housing Corporation are between 1% (for 80% LTV) and 2.75% (for 95% LTV) of the loan principal.
See also
- Mortgage insurance
- Swap credit defaults
References
Source of the article : Wikipedia
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