Mutual mortgage insurance is set up as part of the purchase agreement between the borrower and lender, typically when using a Federal Housing Administration loan. The insurance guarantees the lender the money for the loan in case the borrower does not pay the mortgage.
Benefit to Borrower
If a borrower does not obtain mortgage insurance, the down payment is typically about 20 percent of the home price. With MMI, the borrower often can reduce the down payment to 5 to 10 percent.
Ways to Pay
MMI can be paid in several ways, depending on the agreement between the borrower and the lender. Monthly payments typically can be rolled into the mortgage payment, and the lender sends the money to the insurance company. The home buyer also can make payments annually or as a one-time fee.
Misconceptions
MMI should not be confused with homeowner’s insurance, which covers loss of property due to events such as fire, theft or injury. MMI does not take the place of this type of insurance; it protects the lender only in case of default by the borrower. However, the borrower is responsible for paying the premiums.