Mortgage Insurance

Mortgage Insurance

Mortgage insurance is available in two types. The first type, private mortgage insurance or PMI, protects the lender. The second type, known as mortgage protection insurance, protects the borrower. It is very important to understand the two types of mortgage insurance and the ways in which they can protect the mortgage.

Private Mortgage Insurance
Private mortgage insurance is sometimes required as a condition of the loan. If the borrower pays less than 20% of the total price as a down payment, then he or she is typically required to purchase PMI. This insurance protects the lender if the borrower defaults on the loan. The 20% cutoff is based on the theory that once a borrower has equity in the home, he or she is less likely to default.

PMI can normally be canceled once the borrower achieves 20% equity. However, lenders are not required to remind borrowers of this fact, so it is up to the borrower to keep this number in mind and request that the PMI be canceled at the appropriate time. Additionally, some lenders specify that certain high-risk borrowers, such as those with poor credit histories, maintain PMI until they achieve 50% equity in the home.

PMI payments are generally rolled into the single monthly payment that the borrower must make. Sometimes the total cost of PMI for the life of the loan is actually rolled into the loan itself. In this case, the borrower may be entitled to a refund if PMI is canceled. Clarify with your lender how much your PMI will cost and how payment will be handled.

Mortgage Protection Insurance
This type of mortgage insurance protects the borrower by making his or her mortgage payments in the event of involuntary unemployment, illness or disability. Each insurance company is free to set its own policies, so it is important to shop around for the best program. Low-cost insurance programs are available that will make payments for up to 12 months. Some policies will pay off the mortgage altogether in the event of permanent and total disability of the homeowner, although this type of insurance can pricey.

The lender may offer mortgage protection insurance as part of the loan package. The main advantage is that the payment can often be rolled into the monthly mortgage payment. However, the policy may not be the best deal. It pays to shop around independently to find the best mortgage protection insurance for the borrower's unique situation.