Introduction
Mortgage Guarantee Insurance Company (MGIC)
Mortgage Guarantee Insurance Company (MGIC) is a private firm that insures lenders against losses resulting from a borrower’s default or foreclosure. By purchasing a mortgage insurance policy from MGIC, lenders can recover a portion of the unpaid loan balance if the borrower fails to meet their mortgage obligations.
Purpose and Importance
MGIC provides a safety net for lenders, reducing the risk associated with high loan-to-value (LTV) mortgages, allowing lenders to offer loans to borrowers who might not otherwise qualify for a mortgage with lower down payment requirements.
Examples
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Home Purchase: Collins wants to secure a mortgage covering 90% of her home’s purchase price. Her lender applies to MGIC for private mortgage insurance. After MGIC approves the application and determines the premium, the insurance policy is issued. Consequently, if Collins defaults on her loan, MGIC pays a portion of the loss to the lender.
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Refinance Situation: John refinances his home to get better interest rates and includes a large portion of his equity in the new loan. Since his new LTV rises above 80%, his lender acquires MGIC insurance for this loan to mitigate the risk in case of a default.
Frequently Asked Questions
What is MGIC?
MGIC, or Mortgage Guarantee Insurance Company, is a private insurance provider that offers protection to lenders against losses resulting from borrower defaults on mortgage payments or foreclosure.
How does MGIC work?
When a borrower defaults on a mortgage insured by MGIC, the company compensates the lender for a portion of the unpaid balance, thus reducing the financial impact on the lending institution.
Who needs mortgage insurance from MGIC?
Mortgage insurance from MGIC is typically required for borrowers who make a down payment of less than 20% of the home’s purchase price or have a high LTV ratio, which introduces additional risk to the lender.
How much does MGIC insurance cost?
The cost of MGIC insurance, or the premium paid by the borrower, depends on various factors, including the loan amount, down payment size, and loan term.
Can MGIC insurance help a borrower secure a mortgage?
Yes, by insuring the loan, MGIC makes it more attractive for lenders to approve, especially for borrowers wanting higher LTV loans.
Related Terms
- Mortgage Insurance: A type of insurance policy designed to protect lenders from losses due to the default of a mortgage loan.
- Default: Failure to meet the legal obligations (or conditions) of a loan.
- Foreclosure: The legal process by which a lender attempts to recover the balance of a loan from a borrower who has stopped making payments by forcing the sale of the asset used as the collateral for the loan.
- Private Mortgage Insurance (PMI): A type of mortgage insurance you might be required to buy if your down payment is less than 20% of the home’s purchase price.
- Loan-to-Value Ratio (LTV): A risk assessment ratio calculated by dividing the loan amount by the appraised value of the property.
Online Resources
- MGIC Official Website
- Consumer Financial Protection Bureau (CFPB)’s Mortgage Insurance Guide
- Investopedia’s Guide on Mortgage Insurance
References
Suggested Books
- “The Real Estate Developer’s Handbook: How to Set Up, Operate, and Manage a Financially Successful Real Estate Development Company” by Tanya Davis
- “The Book on Rental Property Investing: How to Create Wealth and Passive Income Through Intelligent Buy & Hold Real Estate Investing!” by Brandon Turner
- “Real Estate Finance and Investments: Risks and Opportunities” by Peter Linneman
