Private Mortgage Insurance VS Mortgage Life Insurance
After signing the mortgage, more than a few homeowners are puzzled over one thing: mortgage insurance. Some of them have no idea that there are 2 types of mortgage insurance. Some can’t tell exactly the difference between the two. And still, some are of two minds facing the two choices. Most importantly, a few homeowners make wrong decisions when confronted with the two.
Mortgage insurance is a topic you can not possibly avoid in most cases. It takes knowledge, information, insights and wisdom to make the right decision. After all, it is the mortgage, the house, the biggest investment we are talking about. Therefore, you need to know what the two types of mortgage insurance are about, their difference, and their impacts on your mortgage and your family.
2 types of mortgage insurance
Generally speaking, there are two types of mortgage insurance:
- Private mortgage insurance (PMI)
PMI is required if your put a down payment less than 20 percent of the value of the loan. You don’t decide whether to buy it or not. Your lender requires you to have it to protect him in the event of your default. Yes, PMI is for the benefit of your lender.
However, there is also the Lender-paid private mortgage insurance. In that case, your mortgage lender pays the mortgage insurance premiums.
But that is not the whole story. It may seem that it does not cost you a dime to meet the lender’s requirement on mortgage insurance. You will change your mind if you know the money spent on the insurance is added to the interest on the mortgage. And who pays the interest? It is you, the homeowner.
1) The cost of PMI
There are no fixed annual premiums on PMI. The cost shows in the total loan value. It ranges from 0.5 percent to 1.0 percent of the loan value. So, if you are taking out a loan of 150,000 dollars and putting down 15 percent, PMI is required. In this case, you are financing 85 percent of the loan. The annual PMI premiums at 1.0 percent would be about 1765 dollars.
The term, type of the loan and the proportion of the home value you decide to finance, the coverage amount, and the frequency of premium payments all affect your annual premiums.
2) The payment of PMI
If it is to be paid by mortgage borrowers, the PMI premium can be paid monthly, bi-monthly, annual, or semi-annually. It could be paid in a single lump sum. It could be paid separately.
If it is to be paid by the lender, the premium will be added to the mortgage interest and paid in the form of monthly payments.
- The cancelation of PMI
The good news is that PMI is not permanent. PMI can be terminated when the loan to value ratio decreases to 78 percent.
You can contact the mortgage servicer who has the right to make request to the PMI company. Lenders, in general, are not required to inform you of the possible termination.
However, some lenders may require you to pay the Lender-paid Mortgage Insurance for a fixed time. As a result, you still have to pay the premiums even though the loan to value ration has dropped below 78 percent.
- Mortgage life insurance
Unlike PMI, the purchase of mortgage life insurance is totally voluntary. You won’t be denied of mortgage just because you don’t buy mortgage life insurance. Whether to buy it or not entirely depends on your choice. Neither can the lender nor the insurance company affiliated with the lender force you into the purchase.
Mortgage life insurance protects your ability to make mortgage payments by giving you a lump sum to cover the remaining mortgage payments. With the money, your family members are able to keep the house without worrying about not having income to make mortgage payments.
The major controversy surrounding mortgage life insurance is that its policies are of decreasing value. The policies pay out the outstanding balance on the mortgage rather the total value of it if the policy holder dies when the insurance is still in force. It creates the paradox in which the more premiums the policy holders pays, the less coverage he will get in the end. That is because inherently the outstanding balance on a mortgage decreases with years. The more monthly payments you pay, the less balance remains on your mortgage. Meanwhile, the mortgage life insurance only pays what’s remaining on the balance.
Another argument about mortgage life insurance is that it may overlap with the traditional life insurance the homeowner already has. The latter also pays out a sum of money when the insured person dies. As a result, it may be a waste to buy both the mortgage life insurance and the traditional life insurance. What’s more, the money paid by traditional life insurance can be used for various purposes. As to mortgage life insurance, it is designed to pay mortgage only.
The relation between PMI and mortgage life insurance
Now you understand that the two types of mortgage insurance are completely two different things. You must buy PMI if your down payment is less than 20 percent of the mortgage principal. But you don’t have to consider the offer of mortgage life insurance if you don’t think the protection it provider makes sense.
It is even safe to say that there is no relation between PMI and mortgage life insurance. You can have neither, either, or both of them on your mortgage. PMI protects your lender in case you default on the mortgage. Mortgage life insurance protects your heirs when you die.
PMI is required for mortgage with down payment less than 20 percent. Mortgage life insurance is recommended if you have dependant, especially children. It also pays if you are diagnosed with illness. In both cases, your family is protected under mortgage life insurance coverage.
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