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.
14 Responses to “Private Mortgage Insurance VS Mortgage Life Insurance”
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December 18th, 2012 at 4:52 pm
Many feel confused about these two terms. Private mortgage insurance is charged when your down payment is below 20% of the house value. It is used to protect your lender once your mortgage goes default. Mortgage life insurance is the right insurance type that helps you pay back your mortgage balance once you pass away unfortunately for some reasons.
December 18th, 2012 at 4:57 pm
I have purchased life insurance for myself, so I don’t think mortgage life insurance is necessary for me. Life insurance will pay out once you die, and the beneficiary can use the money for any purpose. But mortgage life insurance can only be used to pay off your mortgage balance. With the funds from life insurance, the beneficiary can choose to pay off your mortgage as well.
December 19th, 2012 at 9:03 am
Well, regardless of the amount of premiums, PMI enables home purchasers to take out a mortgage loan with low down payment. With it, the lenders are protected against borrowers’ default.
December 19th, 2012 at 9:08 am
“PMI can be terminated when the loan to value ratio decreases to 78 percent.”
But what I know is PMI is not required by the lenders when the loan-to-value ratio has dropped below 80%. So, 75% or 80%?
December 19th, 2012 at 9:17 am
I am not sure of this, but I was told that borrowers can stop paying PMI when the equity in their homes exceeds 20%. 78% or 80% loan to value ratio, it is determined by your lenders.
However, Since it is known as Private Mortgage Insurance, the policy just applies to private mortgage loans. FHA and VA loans have different requirements. You have to continue paying mortgage insurance on your FHA or VA loan after your loan-to-value ratio is reduced to 78% or 80%.
December 19th, 2012 at 9:23 am
The similarity between PMI and mortgage life insurance, in my eyes, is that they both benefit the lenders. PMI protects lenders from borrower’s default, while mortgage life insurance covers the outstanding balance in case of borrower’s death. Both of them help reduce the lenders’ losses.
The difference is that PMI is mandatory if the down payment is less than 20%, while mortgage life insurance is optional.
December 19th, 2012 at 9:33 am
“Mortgage life insurance protects your ability to make mortgage payments by giving you a lump sum to cover the remaining mortgage payments.”
Not exactly! The fact is that the proceeds will directly paid to the lender, your family members or beneficiary will not see a single buck. The good news is the mortgage loan on your house is removed and your loved ones can still live in, but the bad news is they have no right to determine how the proceeds are used.
Therefore, from this point of view, I think mortgage life insurance is a waste of money. I’d rather purchase life insurance with higher coverage limit. In case of my death, the death proceeds can be used to cover my home loan, pay off my medical expenses, fund my children’s future education, etc. Meanwhile, my beneficiary will have the freedom to determine how the proceeds are paid – in one lump sum or in monthly payments.
December 19th, 2012 at 9:39 am
Is there any way to avoid paying Private Mortgage Insurance? I am going to apply for a mortgage loan to purchase a 2-unit property, but I can only afford 10% down payment. Do not want to pay extra money on mortgage insurance. So anyone would be kind to give me helpful tips?
December 19th, 2012 at 9:46 am
@C_U_Again
You can probably try paying a higher interest rate on the loan. Some lenders may agree to cancel PMI if borrowers accept higher interest rates. Sometimes, the difference increased in your interest amount over your loan term is less than the PMI premiums to be paid.
December 19th, 2012 at 9:54 am
Or you can consider take out an 80-10-10 loan to avoid PMI, which includes an 80% first loan, a 10% second loan, and 10% down payment. The interest rate on the second loan is higher, but it just applies to 10% of the total amount.
December 19th, 2012 at 9:57 am
Is there any benefit of mortgage life insurance besides protecting your family members from homeless?
December 19th, 2012 at 10:02 am
green eyes, the major benefit of mortgage insurance is to ensure your family members the peace of mind in case of your accidental passaway. The policy will pay off your home mortgage in full, and thereby, your family members do not have to move out of the house or make monthly mortgage payments.
Oh, another benefit is that you do not need to take medical exams when purchasing mortgage life insurance. So, it can be a valuable choice for homeowners with preexisting healthy problems which prevent them from getting a term life policy.
December 19th, 2012 at 10:07 am
Please help!!!! Anybody knows whether Private Mortgage Insurance can be rolled into the total loan amount?
December 19th, 2012 at 10:12 am
So far as I know, most lenders do not allow borrowers to finance PMI premiums into the total loan amount. If you choose to pay the premiums on a monthly basis, the lender may add the amount into your monthly mortgage repayments.