What is mortgage insurance?

When having somebody co-sign for a morgage with no $$$ down, how does mortgage insurance work?
1) Is it required?
2) Is it permanent?
3) Is it like a car insurance policy - where the money is paid, and if the insurance is never 'claimed' then the money is gone?
3.5) Does a mortgage insurance payment go towards the principle price of the house?
Additional Details
Answer 2/2 seems to be the best one so far... Please include links, if possible. Thanks!

It sounds like youâ€™re talking about private mortgage insurance (PMI), but you might wondering about something completely different: mortgage protection life insurance. This is a type of term life insurance that covers you for a certain number of years, often the same number of years as are remaining the your mortgage. The death benefit coincides with the mortgage amount, so that the policy will pay off the balance of the mortgage should you die before the loan is paid off. If the mortgage balance is less than the death benefit, then the additional money will still be paid to the beneficiary. Typically, the policy has a guaranteed, or set, premium. A variation of mortgage protection life insurance is known as mortgage cancellation insurance. It also is a term life insurance policy payable upon the death of the borrower, however, instead of paying a set benefit, it covers the declining balance of a home loan.

Critics of these policies say you would be better off getting a term policy for the same amount. This would allow the beneficiaries more flexibility with the money after your death. Flexibility, however, is the very thing people are trying to eliminate with mortgage protection life insurance. Grieving family members do not always make the best investment decisions. And, unfortunately, disreputable financial advisors often try to take advantage of survivors. Mortgage protection life insurance guarantees that the insurance money will be used to protect your largest assetâ€”your home. It guarantees that your family will have a roof over its head. It also is recession-proof. Many people think the family can always sell the home to retire debts or pay medical bills. As the housing slump is showing, this is not always the case. The market value of a home can drop below the loan balance, creating â€œnegative equityâ€ in the home. Mortgage protection life insurance solves this problem. It will retire the home loan, no matter what the home value is. The family will own the home, free and clear. They can sell it at a reduced price and still realize a huge profit. Finally, policies can be written to include a terminal illness rider, paying off the home in the event that the policyholder is terminally ill. Rather than losing the house because you are no longer working due to terminal illness, you will be able to pay it off while you are still alive.

I assume you're referring to PMI(private mortgage insurance). When the down payment on a house is less than 20% of the selling price the lender MAY require PMI payments until the 20% amount is satisfied then the PMI is discontinued.

The PMI protects the lender only. A borrower who puts down 20% is less apt to "walk" away from the house( he has 20% equity built in from day 1 in the house).

PMI goes to the insurance company. It is not applied to principal. PMI payments are not refunded back to the borrower once the 20% equity has been reached.

Guy #2 is right on the money.

If you want links, just do a yahoo search of private mortgage insurance. Just about every bank addresses it.

A plan that allows that the mortgage money lenders recover the part of their financial losses if a borrower cannot compensate a loan completely and it is also known as Private Mortgage Insurance (PMI). Assurance that protects mortgage lenders against loss in case of default by the borrower.

1. Yes
2. No
3. Yes
3.5 No

What is mortgage insurance?
It's a financial guaranty that insures lenders against loss in the event a borrower defaults on a mortgage. If the borrower defaults and the lender takes title to the property, the mortgage insurer (MGIC, for example) reduces or eliminates the loss to the lender. In effect, the mortgage insurer shares the risk of lending the money to the borrower. (Mortgage insurance should not be confused with mortgage life insurance, which provides coverage in the event of a borrower's death, or homeowner's insurance, which protects the homeowner from loss due to damage from fire, flood or other disaster.)

Who is mortgage insurance for?
All home buyers can benefit. It allows them to become homeowners sooner, and it dramatically increases their buying power -- excellent benefits from a buyer's perspective. First-time buyers can use a low down payment to help them afford their first home, or to purchase a more expensive home sooner. Repeat home buyers can put less money down and gain significant tax advantages because they will have more deductible interest to claim. They can also use the cash they would have used for a large down payment for investments, moving costs or other expenses.

What does mortgage insurance do for borrowers?
Without the guaranty of mortgage insurance, lenders normally require a borrower to make a down payment of at least 20% of a home's purchase price, which can mean years of saving for some borrowers. This large down payment assures the lender that the borrower is committed to the investment and will try to meet the obligation of monthly mortgage payments to protect his investment. With the guaranty of mortgage insurance, lenders are willing to accept as little as 5% or 10% down from borrowers. Mortgage insurance fills the gap between the standard requirement of 20% down and an amount the borrower can more easily afford to put down on a purchase. A low down payment also allows borrowers to purchase more home than they might otherwise be able to afford. Without mortgage insurance, a borrower who has saved $10,000 for the required minimum 20% down payment would only be able to purchase a $50,000 home.With mortgage insurance (and income and credit permitting), the borrower could make a down payment of only 10% and purchase a $100,000 home with the $10,000! Or put $7,500 down on a $75,000 home and use the remaining $2,500 for decorating, investing, or buying a car or major appliance. Mortgage insurance broadens a borrower's options.

Who pays for mortgage insurance?
Generally borrowers do. An initial premium is collected at closing and, depending on the premium plan chosen, a monthly amount may be included in the house payment made to the lender, who remits payment to the mortgage insurer. MGIC offers flexible premium plans for borrowers:

Annuals. The borrower pays the first-year premium at closing; an annual renewal premium is collected monthly as part of the total monthly house payment.
Monthly Premiums. The cost is slightly more than traditional mortgage insurance plans but monthly premiums dramatically reduce mortgage insurance closing costs. Borrowers pay for mortgage insurance monthly as part of their total monthly house payment but only need to pay one month's mortgage insurance premium at closing, rather than one year's.
Singles. The borrower pays a one-time single premium (instead of an initial premium and renewal premiums). Since single premiums are typically financed as part of the mortgage loan amount, no out-of-pocket cash is used for mortgage insurance at closing.
These plans offer the choice of refundable or nonrefundable premiums. A refundable premium allows the borrower the opportunity to receive money back on any unused portion, in the event that mortgage insurance coverage is discontinued before the loan is paid in full. The cost for a nonrefundable premium is slightly less than that of a refundable premium, thereby giving the borrower a small savings. If coverage is discontinued on a loan with a nonrefundable premium, the borrower has no opportunity for a refund.

Is there anything else important to know?
No. Just remember, with mortgage insurance, borrowers can increase buying power, put less money down and purchase a home sooner. It's as simple as that.

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