- Mortgage Insurance

Lenders Mortgage Insurance/Private Mortgage Insurance

Lenders Mortgage Insurance (LMI), also called Private Mortgage Insurance (PMI), is insurance that protects the lender in a mortgage transaction. If the borrower defaults on their mortgage loan and the lender cannot recover their costs even after foreclosing and selling the property they will be protected with Lenders Mortgage Insurance.

LMI is required by most lenders if the borrower is borrowing more than 80% of the home’s purchase price or appraised value. The insurance premiums are paid by the borrower, the premium may be payable up front or it may be added onto the loan amount. To avoid paying LMI premiums, some borrowers take out a first mortgage of 80% of the purchase price and then take out a second mortgage or ‘piggy-back loan’ to cover the difference minus their down payment. Mortgages insured by the Federal Housing Association (FHA) have a similar lender mortgage insurance called mortgage insurance premiums (MIP).

The cost of PMI premiums varies according to the type of loan, the size of the down payment, and the amount of coverage required by the lender. The premiums generally range from 0.2% to 1.5% of the total loan amount, and usually decrease after 10 years. MIP is 1.5% of the loan amount at closing.

In the past lenders could continue to collect LMI premiums even after the homeowner’s equity was more than 20%, but under the Homeowners’ Protection Act of 1998 borrowers can now have their LMI premiums terminated once they have built up sufficient equity in their home. For most mortgage loans the lender’s mortgage insurance can be cancelled at the borrower’s request once the loan balance reaches 80% of the property value at time of purchase, and it must be cancelled once the balance reaches 78%. However for mortgage loans sold by lenders to the federal agencies Fannie Mae and Freddie Mac, the mortgage insurance must be terminated once the loan balance reaches 80% of the current property value, established by a property appraisal paid for by the borrower.