Reader inquires about mortgage insurance premiums

Q: Could you please tell me what the ramifications are if you default but you carry mortgage insurance premium on your home mortgage? Thanks in advance for your help. -- Damon B., Las Vegas

A: That's a good question. As you may know, MIP is also referred to as private mortgage insurance or PMI.

Either way, you should know that mortgage insurance protects lenders, not homeowners.

So, the short answer to your question is that MIP really has no impact on homeowners who default on their mortgage.

To get some advice from an expert who deals with such issues every day, I turned to Kari Phillips, a senior loan officer at a local mortgage company that is an affiliate member of the Greater Las Vegas Association of Realtors.

"Mortgage insurance protects the lender, not the borrower in any way," Phillips said. "Once the borrower misses payments, the servicer (of the loan) notifies the insurance company. This is when the insurer's loss mitigation department is contacted. The mitigation department gets with the lender and they see how this can be resolved.

"The servicer has to determine what to do with the property. Value is determined. Then they take into consideration the losses, such as attorney fees, Realtor costs and upside down equity. When this is determined, the servicer files a claim with the mortgage insurance company. The company will pay a portion of their loss."

Phillips adds that the portion of the loss typically covered by mortgage insurance ranges from 12 to 30 percent, as determined when the home was purchased. The lower the loan to value ratio on the loan, she said, the lower the coverage provided.

For those with similar questions, here are some facts about MIP.

Mortgage insurance is a financial guarantee insuring lenders against losses if a borrower defaults on their home mortgage. If the borrower defaults and the lender takes title to the property, the mortgage insurer reduces or eliminates the loss to the lender, basically sharing the risk of lending money to the homeowner.

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 homeowners from losses stemming from fires, floods or other incidents.

Without mortgage insurance, lenders would normally require a borrower to make a down payment of at least 20 percent of a home's purchase price. With the guarantee of mortgage insurance, lenders are willing to accept down payments of as little as 5 or 10 percent.

All Federal Housing Administration loans require MIP. A premium of 1.50 percent of the loan amount is paid when you close on your loan. It can be financed into your mortgage. On a monthly basis, FHA borrowers pay a .50 percent premium. Condominium buyers using FHA loans do not have to pay MIP up front, but do have to pay a monthly MIP.

The MIP paid on an FHA loan is higher than on a conventional loan. On a conventional loan, borrowers pay as little as .50 percent (with a 10 percent down payment) with a renewal rate in subsequent years as low as .30 percent.

In 2007, MIP became tax-deductible, like the interest paid on a home mortgage.

Once you have at least 20 percent equity in your home, you can generally stop paying MIP.

I hope that helps. For more information and for a list of affiliated experts in this area, visit lasvegasrealtor.com and click on the links page.

Sue Naumann is the president of the Greater Las Vegas Association of Realtors and has worked in the real estate industry for nearly 30 years. GLVAR has nearly 14,000 members. To ask her a question, e-mail her at ask@glvar.org. For more information, visit lasvegasrealtor.com.