Whether you’ve just purchased your first house or you’ve built up some equity in your home, there’s no doubt about it: home ownership is expensive. Because of this, it’s tough to want to add the additional expense of mortgage insurance to your monthly bills. However, you shouldn’t rule it out without doing some research.
2 Types of Mortgage Insurance
There are two basic types of mortgage insurance: private mortgage insurance and mortgage protection insurance. It is important for you to understand the differences between these two and carefully consider whether you need to purchase either one or both of these forms of mortgage insurance. They serve entirely different purposes, one protects you while the other protects the lender should you default.
Private Mortgage Insurance
Private mortgage insurance (PMI) is a financial product that protects the lender from the financial risk of homeowner default. In the event that the borrower defaults on the loan, the insurance provider will cover the lender’s losses on the loan. PMI is sold by both private companies as well as governmental agencies involved in the mortgage industry.
PMI Requirement
In some cases, a borrower is required by either law or lender requirement to purchase PMI. Generally, any buyer who does not pay at least a 20% down payment will be required to buy PMI. As the homeowner makes the mortgage payments and accumulates 20% equity in the home, the buyer can then choose to drop the PMI.
Mortgage Protection Insurance
Mortgage protection insurance (MPI) is a financial product that protects the homebuyer in the event that the buyer is unable to make his or her mortgage payments. If a claim is made on the MPI insurance, the insurer will pay the mortgage company directly. MPI is sold by private companies and can be purchased when buying the home or added at a later time.
Covered Events
MPI generally covers only specific events that may cause a homeowner to be unable to make the mortgage payments such as death, disability or job loss. Typically, MPI will pay off the entire mortgage if the buyer dies, but in the case of disability or job loss, the MPI will make the mortgage payments for a specific amount of time. For example, the MPI may make the mortgage payments for one year in the event of a job loss.
Mortgage Protection Insurance Advantages
One advantage of MPI is that this form of mortgage insurance is generally guaranteed acceptance. This means that a buyer with a dangerous job, health problems or other risks will be eligible to buy the insurance. The premium cost of MPI can be built into the mortgage loan, helping to make it easier to manage the payment process. In some cases, MPI is convertible into a traditional life insurance policy.
Mortgage Protection Insurance Disadvantages
The cost of MPI will vary depending on a number of factors. MPI costs will be higher if a person has a high mortgage balance, has health problems or works in a dangerous environment. The premium cost of MPI is typically level, meaning it will not increase over the life of the policy. But because the balance due on the loan is decreasing the value you are getting for your money is also decreasing (it is designed this way to compeensate for the fact that you are getting older as well).
Mortgage Protection Insurance Alternatives
An alternative to buying Mortgage Protection Insurance is to buy either a whole or term life insurance policy to cover the amount of the mortgage in the event of an untimely death. The advantage of this is that the face value doesn’t decrease as the loan balance decreases so the remainder is available for to cover other debts. However, whole life insurance may be more expensive and if all you are trying to cover is the debt related to owning the home MPI may be more economical. But be sure to look at term insurance as well it may be even more economical plus give you additional coverage.
Disability insurance can also be purchased to cover the mortgage payments in the event of a disability. MPI is much like both life and disability insurance combined. A careful look at all the angles surrounding mortgage insurance, life insurance, and disability insurance, will help you determine the best ways that it can be used to meet your family’s financial needs. By taking a few moments and analyzing what risks you need to protect against you can then decide whether mortgage insurance in a good way to spend your resources!
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