This post is not referring to Mortgage Insurance to payoff of your mortgage in case of your death (which protects the lender), but it relates to the other way you can protect the lender from some losses.
Update 3-29-2015: Real Estate Insider: Mortgage insurance? You must be kidding. No, here’s another explanation of how it helps reduce the risk to the lender and interest rates charged to consumers and allows them to purchase homes.
Since lenders have traditionally taken a risk losing some portion of the loan upon property foreclosure, lenders normally charge the borrower insurance on the portion above 80% of of original loan value. This insurance is referred to as (Private) Mortgage Insurance (PMI) or Mortgage Insurance Premium (MIP) on FHA loans.
Typically, PMI is charged to the Buyer on a monthly basis and by Federal Law makes it allowable until your current loan balance reaches 78% of the original loan balance. As of April 1, 2013, all FHA loans afterward “never” drop MIP unless you refinance into a non FHA loan.
Lenders currently are proposing up front one time payment of PMI instead of charging monthly premiums. However, my guess is that it’s more than most people really want to cough up (i.e., depending on how long they plan to live in the property) and if PMI is still deductible, you can’t deduct more than the allowable annual PMI amount. I don’t know when PMI will be removed as eligible deduction, but I imagine sooner than later. Consult with your CPA/Tax Preparer/or www.irs.gov for current rules.
In fact, I just heard the up front one time PMI charge availability on Ray Lucia’s program today (4-9-2013).
Crystal Ball says: I can see lenders and insurers get together and increase the coverage to anything over 75% LTV and justify it by saying the losses over the mortgage meltdown were huge and this protects the insurers and the lenders even more – but the consumer will pay for the extra insurance.
Here is the Mortgage Insurance Industry Association website.