Question

8. Sam bought a house that costs $500,000. Sam got a 96% LTV loan. The lender demanded that Sam buy private mortgage insurance to insure the portion of the loan over 75% LTV.

Suppose 5 years later, Sam’s mortgage balance is $400,000. However Sam defaults and his house sells for $220,000 in a foreclosure auction. How much will the mortgage insurance company pay Sam’s lender?

Answer 1

Loan value= 96%* $500000= $480000

75% LTV value= $375000

Portion of loan over 75% LTV= $105000. This is the amount insured.

5 years later, Sam needs $400000 more to pay. But he defaults.

And he has only paid $100000 of mortgage loan.

So, insurance company will pay the remaining balance of the amount insured to Sam's lender.