YOU ASK:

Whatever happened to private mortgage insurance - wasn't that supposed to protect the banks from bad borrowers?

WE ANSWER:

Yes, private mortgage insurance protects the interests of banks so that even if the borrower defaults on the payments, the bank will still receive the remaining balance of the loan.

By law, those who are able to pay 20% of the down payment are not required to get mortgage insurance, especially if they have a good credit rating. They are considered to have shown the capability of maintaining the payments on the loan and with the amount that they already have invested on the property, they are less likely to default on the amortization payments of the mortgage.

However, those who have a bad credit rating and those who can only afford to pay less than 20% down payment on the property are commonly required to take out private mortgage insurance.

With today's economic environment, banks use mortgage insurance to ensure that they are paid for the loans they release. This also allows those who have less cash to buy the loan sooner, without having to wait until they are able to save up for the down payment.

As per the Homeowner's Protection Act of 1998, the bank is required to give disclosure to the borrower about details of the loan. The HPA also requires automatic termination of the mortgage insurance once the loan-to-value reaches 78%.

The borrower may also request for cancellation of the loan. When the borrower's equity is less than 20%, the bank can decide whether to grant cancellation. However, once the borrower's equity reaches 20%, the bank has to grant his request of termination of mortgage insurance.

With the HPA, both the interest of the bank and the borrower are protected. The bank is required to disclose information that the borrower can decide on. In the past, the borrower was solely responsible in tracking whether his equity has already reached 20%. But with the new requirements, both the borrower and the bank share the responsibility of tracking the loan balance.

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