Although they sound alike, Private mortgage insurance (PMI) and mortgage protection insurance (MPI) are two entirely different types of insurance created for vastly different purposes.
What is Mortgage Protection Insurance (MPI)?
Mortgage protection insurance is essentially a life insurance policy designed to pay off your mortgage in the event of your death so your heirs won’t lose their home. Mortgage protection insurance is similar to term life insurance in that it ends when your mortgage is paid off. But is is cheaper than typical term insurance because the amount of insurance necessary to pay off the mortgage is constantly declining as your equity in the home increases.
What is Private Mortgage Insurance (PMI) ?
On the other hand, private mortgage insurance protects the lender against missed payments or outright default.
Protecting Your Mortgage Investment
While this real estate market continues to burn in the wreckage, there is a glimmer of hope emerging. In addition to a little more life flowing into the real estate market right now during the summer months- interest in private mortgage insurance is also growing. According to the Reuters online news site, the mortgage insurer Radiant Group Inc. doubled the amount of mortgage insurance policies this year.
Private mortgage insurance is not just another extra cost on the mortgage paperwork- more consumers are starting to see it’s also a wise investment. because it can reduce the interest rate on the overall mortgage.
Mortgage insurance refers to insurance that is paid either to the lender or a third party company as a safety net on the buyer’s ability to pay back the loan. In most cases, private mortgage insurance is only required by the lender if the borrower’s down payment is less than 20% or if their credit rating is sub-par.
Private Mortgage Insurance primarily protects the lender. With private mortgage insurance, if the buyer finds themselves unable to pay their loan installments, the insurance company will temporarily take over payments. If there is foreclosure, the insurance company will offset the lender’s losses after the sale of the defaulted property.
Ultimately, private mortgage insurance is excellent for both the borrower and the lender. The borrower is covered for job loss or injury circumstances that render them unable to make mortgage payments. As for the lender, they can rest assure that they’ll receive loan payments regardless of what happens with the borrower. In exchange for this added security, the bank may reward the borrower with a better interest-rate on the loan.
Some lenders build mortgage insurance into the loan structure. This is often called “loan repayment insurance” and is a more generalized version of private mortgage insurance. However, be cautious of these bundled deals, as there is often a very high APR involved. Because it is bundled into the loan, you may even be paying interest on the insurance as well as the loan. In addition, you may be required to keep the PMI for the life of the loan rather than just until your equity exceeds 20%. There is some controversy in this arena, as some lenders include this type of insurance in their loans without full disclosure. As a general rule, you’ll get better quality and a better deal on your mortgage insurance if you go through a private company.
The average PMI premium is about $55 monthly for a $100,000 loan. Of course, the consumer should shop around and get the best insurance for the best rate. Be sure to compare policies and choose one with coverage that satisfies your needs. Read the fine print, ask questions, and make sure you fully understand the policy before signing on.
Regardless of the market, it’s important to be informed and prepared when it comes to protecting your investment. After all- it’s the largest purchase you will likely make in your lifetime. Insurance of any kind can offer peace of mind against the storm of life- whether it’s car insurance, renter’s insurance, private mortgage insurance or mortgage protection insurance.
Insurance offers peace of mind and a safety net, as long as you’re an informed buyer. No matter what type of insurance- be sure to know what coverage you need and shop around for the best price. Don’t settle for less than what’s best for your situation. You’ll be glad you did your homework.
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