If you are wondering whether or not you will be required to take out mortgage insurance when you buy a house, you will want to be aware of the distinction between two different types of mortgage insurance.
Private Mortgage Insurance (PMI) is insurance that protects the bank underwriting your mortgage loan. If you default on your loan, the PMI will insure the bank against the loss. Private mortgage insurance is usually required when a home is purchased with a down payment of less than 20% of the purchase price. However, by requesting a higher mortgage interest rate (which is tax-deductible) your lender may waive the private mortgage insurance requirement.
Mortgage Protection Insurance (also known as mortgage life insurance, mortgage payment insurance, or MPI) on the other hand, is an optional insurance product that will pay your mortgage in the event of injury, death or job loss. This is basically a modified life insurance policy.
There are several advantages to taking out mortgage protection insurance. One advantage is that most policies will pay out the full amount of your original mortgage, even if you have significantly paid down that mortgage in the meantime. If your original mortgage was $120,000 (the approximate national average) and you had paid down that debt to $60,000 when you died, only the remaining $60,000 of your debt would go to your lending institution and your beneficiary would get $60,000 to put in the bank.
Another advantage to mortgage protection insurance over life insurance is that while life insurance generally requires policyholders to have a medical exam before purchasing, you can most likely qualify for mortgage protection insurance, which grants similar benefits, merely by being a homeowner with a mortgage loan.
There are often time limits of one or two years after closing the deal on your home when insurance companies will let you take out mortgage protection insurance. Also, keep in mind that policies which will pay your mortgage in the event of injury and job loss tend to be more expensive than those policies that only pay your beneficiary’s mortgage upon your death.
Only a small percentage of U.S. homeowners carry mortgage protection insurance, perhaps because it is an optional extra premium every month that many homeowners do not want to be bothered with. Private Mortgage Insurance (PMI), on the other hand, is required in many home-buying situations. Find out whether your mortgage lender will require you to pay PMI before making the final decision to take out mortgage protection insurance for extra security.