What is mortgage insurance? How is it different from homeowner’s
insurance?
Mortgage insurance, often called "private mortgage insurance" or
PMI for short, insures the lender against losses which could be
incurred should the borrower not make payments and the loan go into
default. It is this kind of insurance which allows lenders to make
loans where the borrower's down payment is less than 20%. Conceptually,
it is patterned after the federal government’s FHA home loan programs
in which the federal government guarantees lenders against the loss
of default for loans on properties on which the borrower puts down
as little as 3% of the purchase price.
The term "mortgage insurance" is also used for those types of life
insurance policies which are used to pay off the balance of the
mortgage in the event of the borrower’s death. Yes, it is confusing.
Homeowner’s insurance, also referred to as hazard insurance, is
your traditional insurance used to protect the borrower/homeowner
against property loss from fire, weather, etc.
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