Understanding Mortgage and Title Insurance

What is (PMI) Private mortgage Insurance?

Private Mortgage Insurance is set up to protect the mortgage lender against a financial loss in the event the borrower defaults on their mortgage.  Private mortgage insurance is typically required by lenders for borrowers who finance more than 80% of their new property’s value.  PMI benefits the mortgage lender but the responsibility for payment falls on the borrower.

• What benefit does the borrower receive from Private Mortgage Insurance?

The benefit of PMI for the lender is quite obvious, it provides insurance for loans that the lender deems more likely to fall in default by the borrower.  The benefit to the borrower is that it affords them the opportunity to purchase a home with a lower cash investment, or down payment, than usual.   Nowadays, not every new homebuyer has 20% in available funds to put as a down payment , and if not for PMI, would not be able to purchase a home.

• What will private mortgage insurance cost me?

It is important to speak with your mortgage lender at the beginning of your application process to determine if you will be required to purchase private mortgage insurance.  If you are required to purchase PMI, the type of loan, length of term of the loan, and your mortgage to home value will all be factored in to determine your monthly PMI payment.  Payment of  mortgage insurance normally consists of an upfront payment and then monthly installments until your equity in the home reaches 20%, or to put it another way, your mortgage does not exceed 80% of your home’s value.

What is Title Insurance?

Title insurance is an insurance policy that protects against a loss arising from problems or errors connected with the title or deed to your property.  Unless you built your own house, most likely you were not the first person to own your home and, therefore, there were probably several ownership changes before you.  A title search is always performed on your property before you purchase it to make sure no one else has ownership interest in your property and to protect against any recorded liens attached to the property or apparent title defects, but no title search is 100% dependable.  There may have been a forged signature or a typographical error that wasn’t able to be discovered in the title search of previous owners that now affects your ownership interest in the property.  If not for mortgage insurance protection, the lender may have a loan on a property that you don’t own. Title insurance insures that the lender is protected up to the amount of the mortgage if a problem or dispute with the title to your property.

• What if my home was new construction, do I still have to purchase title insurance?

Yes, even if you were the first person to build on your piece of land, if you take out a mortgage on the property, the lender will require you to purchase title insurance.  The title insurance policy protects the parcel of land that you purchased, which most likely has changed ownership several times in the past even if you were the first to build on it.

• Now we know that the lender’s interest is protected, what about the property owner’s interest?

There are two types of title insurance policies.  The lenders policy, discussed above, which protects the lender’s interest in the property and typically covers up to the mortgage value.   Then there is an Owner’s policy, which can be purchased to protect the owner’s interest in the property or “gap coverage”, the amount of equity between the value of the home and the mortgage value.

The lender will require you to purchase the lenders policy and then you have the option to purchase your own coverage, or what is called the owners policy.  As mentioned, you are not legally required to purchase a owners policy, but compared to the protection it offers, the cost is minimal, usually a couple hundred dollars at most.  The majority of your title insurance fee will be spent on the lenders policy.

• How much will title insurance cost me?

The lender’s policy is calculated based on your mortgage loan amount.  The owner’s policy is calculated based on the purchase price of your policy.

The First American Title Co. provides a Title Fee Calculator (http://facc.firstam.com) to help you estimate what your title insurance fees will be.