What is the difference between Private Mortgage Insurance and Mortgage Insurance?
by Jerry Ricketts 09/27/2013
Basically, there are two distinct types.
Mortgage Insurance to protect the lender:
Lenders and banks are in business to make money so they want to make sure that they get paid when making a home loan. How can they do that when a borrower fails to pay back the home loan? Quite simple really. With a conventional loan the borrower is required to take out PMI or “private mortgage insurance” whenever the down payment is less than 20% of the home’s purchase price. You pay this extra premium monthly and the premium is determined by the size of your down payment. Buyers can usually drop mortgage insurance payments when they have 80% loan-to-value (LTV) in their home. You don’t get to choose the mortgage insurance company and you can’t negotiate the premiums. Doesn’t seem fair but that’s the way it works when a mortgage exceeds 80% loan-to-value. This type of mortgage insurance is also know as mortgage guarantee.
Mortgage Insurance to protect against death:
Life insurance companies offer a product also called mortgage insurance or mortgage life insurance. Its purpose is to pay off the mortgage if a homeowner/borrower dies before the loan is paid off. Often, there are two breadwinners insured in case either party dies prematurely. Both term life insurance and permanent life insurance products are used to accomplish this depending on the needs of the borrower. Since the insurance coverage or face amount of the protection coincides with the balance of the mortgage, it is called mortgage insurance or mortgage life insurance. Unlike PMI, this mortgage insurance is dedicated to protect the homeowner’s family in the event of a bread winners death by paying off the mortgage balance. It is optional and not a part of the monthly house payment. Therefore, this coverage is maintained and controlled by the homeowner…not the lender. Why is this important? In the future, with individually purchased mortgage insurance (unlike PMI) when your mortgage loan is sold to another lender or if you refinance your existing home loan you can keep this mortgage insurance in force. Keeping control of your mortgage insurance is critical because in later years, borrowers either don’t qualify medically for future insurance coverage, are too old or simply can’t afford the higher older age premiums. This type of mortgage life insurance is purchased individually, typically through an agent who specializes in this type of protection. It is an inexpensive way to protect your family from being unable to make future mortgage payments if one or both of the borrowers passes away.
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