Do I Need Mortgage Insurance
Some people have lots of money for a down payment. For everyone else, theres mortgage insurance. If you have already determined that you cant afford a standard down payment on a home but you still want to buy, dont despair. Mortgage insurance exists to help make you a more attractive candidate to lenders.
Mortgage Protection Insurance Vs Pmi
People often hear mortgage insurance and automatically think of PMI, or private mortgage insurance. However, there are some clear and distinct differences between the old mortgage protection insurance policies and the PMI coverage required on many mortgage loans.
Mortgage protection insurance was an optional coverage meant to pay off the balance of a home loan if the owner passed away. Private mortgage insurance is coverage that mortgage lenders may mandate if the borrower does not put up a down payment of at least 20 percent when buying the home. PMI protects the lender, not the borrower, if the debt is not paid as scheduled. It will not pay off the balance of the home even if the borrower passes away unexpectedly.
What Is Private Mortgage Insurance
Private mortgage insurance is a type of insurance that a borrower might be required to buy as a condition of a conventional mortgage loan. Most lenders require PMI when a homebuyer makes a down payment of less than 20% of the home’s purchase price.
When a borrower makes a down payment of less than 20% of the property’s value, the mortgage’s loan-to-value ratio is over 80% .
Unlike most types of insurance, the policy protects the lender’s investment in the home, not the individual purchasing the insurance . However, PMI makes it possible for some people to become homeowners sooner. For individuals who elect to put down between 5% to 19.99% of the residence’s cost, PMI allows them the possibility of obtaining financing.
However, it comes with additional monthly costs. Borrowers must pay their PMI until they have accumulated enough equity in the home that the lender no longer considers them high-risk.
PMI costs can range from 0.5% to 2% of your loan balance per year, depending on the size of the down payment and mortgage, the loan term, and the borrower’s . The greater your risk factors, the higher the rate you’ll pay. And because PMI is a percentage of the mortgage amount, the more you borrow, the more PMI youll pay. There are several major PMI companies in the United States. They charge similar rates, which are adjusted annually.
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What Is Mortgage Protection Insurance And How Does It Work
Mortgage protection insurance is life insurance that can help protect your family if you die before the loan is paid off and you cant make your monthly mortgage payments. This policy will pay off your mortgage, which can help keep your family from losing their home if something unexpected happens.
Mortgage protection insurance can also be known as Mortgage Redemption Insurance.
Mortgage Life Insurance Vs Term Or Permanent Life Insurance
As you pay down your mortgage, mortgage life insurance covers a smaller amount of money.
Term or permanent life insurance may provide better value than mortgage life insurance. With term or permanent life insurance, the death benefit, or amount payable to your beneficiaries, won’t decrease over the term of the policy. Upon your death, your beneficiaries may use the insurance money to pay for the mortgage.
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Private Mortgage Insurance Coverage
First, you should understand how PMI works. For example, suppose you put down 10% and get a loan for the remaining 90% of the propertys value$20,000 down and a $180,000 loan. With mortgage insurance, the lender’s losses are limited if the lender has to foreclose on your mortgage. That could happen if you lose your job and can’t make your payments for several months.
The mortgage insurance company covers a certain percentage of the lenders loss. For our example, lets say that percentage is 25%. So if you still owed 85% of your homes $200,000 purchase price at the time you were foreclosed on, instead of losing the full $170,000, the lender would only lose 75% of $170,000, or $127,500 on the homes principal. PMI would cover the other 25%, or $42,500. It would also cover 25% of the delinquent interest you had accrued and 25% of the lenders foreclosure costs.
If PMI protects the lender, you may be wondering why the borrower has to pay for it. Essentially, the borrower is compensating the lender for taking on the higher risk of lending to youversus lending to someone willing to put down a larger down payment.
The Benefits Of Mortgage Insurance
Let us tell you about the benefits of buying mortgage insurance with an insurance company.
As we all know, buying a home is one of the most important transactions you will ever make. Youve found your dream home and have bought home insurance to cover your property and legal liability. So now, all you have left to do is unpack your boxes and settle in. Not so fast!
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What Is Homeowners Insurance
Homeowners insurance, also known as home insurance, is coverage that is required by all mortgage lenders for all borrowers. Unlike the requirement to buy PMI, the requirement to buy homeowners insurance is not related to the amount of the down payment that you make on your home. It is tied to the value of your home and property.
What Are Optional Mortgage Insurance Products
Optional mortgage insurance products are life, illness and disability insurance products that can help make mortgage payments, or can help pay off the remainder owing on your mortgage, if you:
- become critically ill
Optional mortgage insurance is a type of credit and loan insurance that you are usually offered when you take out or renew a mortgage. You dont need to purchase optional mortgage insurance to be approved for a mortgage.
There are important limits on the coverage that optional mortgage insurance products provide. Read your policy carefully and ask questions if theres anything you dont understand before purchasing these products.
These optional products are different from mortgage loan insurance that you are required to purchase if your down payment on your home is less than 20%.
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Is Mortgage Protection Insurance Mandatory
It is not mandatory however, we do recommend it as it is not uncommon for us to get calls from people we have visited or talked with in the past about mortgage protection insurance.
The call often goes like this My died a short time ago, and we were going through their belongings and found your informationwe were hoping they had purchased some mortgage protection insurancedo you know if they did?
They found our business card or contact information while going through their loved ones belongings or computer records, and they hoped the person now deceased had purchased mortgage protection insurance for their home.
We also get calls occasionally from people we have talked with before, but they declined to get mortgage protection insurance.
They have recently developed a serious illness or life-threatening disease , and they want to see if they can get insurance now. The answer is usually no.
The best time to get mortgage insurance is when you are healthy. Dont make the mistake of waiting until you become uninsurable to apply for coverage.
You Can Convert Your Mortgage Insurance
An insurance company will allow you to convert your mortgage insurance to permanent life insurance, as needed, throughout the term of your loan. If you do convert your insurance, your premium will not increase and you will not have to undergo a medical exam. The policy will remain in force until your death.
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Mortgage Protection Insurance In Case Of Death
Mortgage insurance pays off the remaining balance on your mortgage if you die. This protects your family from falling behind on mortgage payments, which can lead to foreclosure or having to sell your home.
Depending on the policy, mortgage insurance may pay off the entire mortgage at once or it may pay the mortgage off over a period of time, such as five years. The longer the length and size of the payoff, the more youll pay in premiums.
The death benefit for mortgage protection insurance pays the lender on your mortgage not your family. Unlike traditional life insurance policies, your loved ones will not get to use the money from an MPI policy.
You can also add riders to help with living benefits. These benefits could include paying for your mortgage if you become disabled and cant work or lose your job. For instance, you could add a long-term disability rider that pays up to 60% of your income to help your bills if you become disabled and cant work. Adding riders usually increases your premiums. However, riders can help you customize a policy that works for you.
Read Your Mortgage Life Insurance Policy
There are many varieties of mortgage life insurance, but Garcia says policies are more useful if they are structured to help you pay your mortgage if you lose your a job.
While there are policies that will cover lost wages, “you have to be careful,” cautions J. Robert Hunter, director of insurance for the nonprofit Consumer Federation of America.
“Sometimes there are limits on what they will pay,” Hunter says. “Sometimes it is only for six months.”
Financial advisers often question the need for mortgage life insurance. They say you usually are better off if you can save six months’ worth of typical expenses in an emergency fund rather than buy insurance you may not need.
Hunter says it’s always a mistake to purchase life insurance in connection with real estate transactions. “This is a form of credit life insurance,” he says of mortgage policies. “The pitch is always the same: ‘When the breadwinner dies, the house is paid off.’
However, Hunter warns that “you shouldn’t think about life insurance in those terms.”
“You have to think about life insurance as a much broader issue,” he says. “It is not to own a house, it is to protect the family.”
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Alternatives To Mortgage Insurance
Mortgage insurance is one way to protect your home, but there are other options, including term life and permanent life insurance.
Most mortgage insurance policies are similar to term life policies. But there are notable differences.
Here are the pros and cons of mortgage insurance, term and permanent coverage.
Mortgage Insurance vs. Term Life and Permanent life
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No matter what policy you decide, make sure to shop around to find the right plan for you. Mortgage life insurance can be a wise choice if whats most important is to pay off your mortgage.
Is Mortgage Protection Insurance The Same As Payment Protection Insurance
Mortgage protection and payment protection are both types of insurance that cover a single specific debt, but thats where the similarities end. Mortgage protection insurance is specific to your mortgage and pay-outs will be paid directly to you. PPI covers unsecured finance and pay-outs are paid to the lender, rather than you.
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Mortgage Disability And Critical Illness Insurance
Mortgage disability and critical illness insurance may make mortgage payments to your lender if you can’t work due to a severe injury or illness.
Mortgage disability and critical illness insurance is usually a combination of several insurance products, including:
- critical illness insurance
- job loss insurance
Most insurance plans have a number of conditions attached to them, including a specific list of illnesses or injuries that are covered or excluded. Pre-existing medical conditions are usually not covered. These terms and conditions of insurance are listed in the insurance certificate. Ask to see the insurance certificate before you apply, so you understand what the insurance covers.
Before you buy mortgage disability or critical illness insurance, check if you already have insurance coverage that meets your needs through your employer or another policy.
Mortgage Debt Is On The Rise
63% of homeowners in the U.S. have a mortgage payment. The average new mortgage balance in the United States is $260,386, and these numbers are increasing every year. With debt, it can be challenging for someone to pay back what is owed if they cannot finish their payments, which is why getting coverage is essential.
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What Is Mortgage Life Insurance
Mortgage life insurance, also known as mortgage protection insurance, is a life insurance policy that pays your mortgage debt if you die. While this policy can keep your family from losing the home, itâs not always the best life insurance option.
Mortgage life insurance designates your mortgage lender as the policyâs beneficiary, which means your loved ones donât get a death benefit if you die during the policyâs term. The lender instead uses the mortgage protection insurance death benefit to wipe out the rest of your mortgage.
A mortgage protection life insurance policyâs premiums remain level during the term, but the policyâs value decreases as your mortgage decreases.
How Much Pmi Costs
The cost of PMI varies but is usually around one-half of 1% of the loan amount. So, it’s well worth the effort to get rid of it as soon as you can, if you can. Also, keep in mind that mistakes often happen, and the servicer might not remember to cancel PMI once your loan balance gets to 78% without you reminding them.
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How Long Do You Have To Buy Private Mortgage Insurance
Borrowers can request that monthly mortgage insurance payments be eliminated once the loan-to-value ratio drops below 80%. Once the mortgage’s LTV ratio falls to 78%, the lender must automatically cancel PMI as long as you’re current on your mortgage. That happens when your down payment, plus the loan principal you’ve paid off, equals 22% of the home’s purchase price. This cancellation is a requirement of the federal Homeowners Protection Act, even if your homes market value has gone down.
Mortgage Protection Life Insurance
MPI is designed around your mortgage debt. It is often sold during the home-buying process. Suppose you pass away while on the active policy the payout goes to your lender for the outstanding balance. Usually, as you pay off your mortgage and your balance owed goes down, then so does your coverage amount.
MPI Pros
- The payout amount is reduced over time, yet premiums remain the same
- The lender receives the benefit
- Protects only your mortgage
- Often costs more than term life insurance
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Fha Mortgage Insurance Premium
FHA loans feature minimum down payments as low as 3.5% and have easier credit qualifications than with conventional loans. Most FHA home loans require an upfront mortgage insurance premium and an annual premium, regardless of the down payment amount. The upfront premium is 1.75% of the loan amount, and the annual premium ranges from 0.45% to 1.05% of the average outstanding balance of the loan for that year.
You pay the annual mortgage insurance premium, or MIP, in monthly installments for the life of the FHA loan if you put down less than 10%. If you put down over 10%, you pay MIP for 11 years.
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How To Get Rid Of Pmi
If you opt for BPMI when you close your loan, you can write to your lender in order to avoid paying it once you reach 20% equity. If youre a Rocket Mortgage® client, you can avoid the process of finding a stamp altogether and just give us a call at 508-0944.
Your letter should be sent to your mortgage servicer and include the reason you believe youre eligible for cancellation. Reasons for cancellation include the following:
- Reaching 20% equity in your home.
- Based on significant improvements to your home. If youve made home improvements that substantially increase the value of your home, you can have mortgage insurance removed. If your loan is owned by Fannie Mae, you must have 25% equity or more. The Freddie Mac requirement is still 20%.
- Based on increases in your home value not related to home improvements. If youre requesting removal of your mortgage insurance based on natural increases in your property value due to market conditions, Fannie Mae and Freddie Mac require you to have 25% equity if the request is made 2 5 years after you close on your loan. After 5 years, you only have to have 20% equity. In any case, youll be paying for BPMI for at least 2 years.
For your request to cancel mortgage insurance to be honored, you have to be current on your mortgage payments and an appraisal has to be done to verify property value.
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Mortgage Protection Insurance Vs Private Mortgage Insurance
Mortgage insurance may sound similar to Private Mortgage Insurance , but theyre entirely different.
PMI protects the bank or lender in case a homeowner stops paying a mortgage. If youve purchased a home with less than 20% down, your lender probably required you to purchase PMI.
While mortgage protection insurance will pay off your loan when you die, PMI is intended to cover a portion of your loan if you default. The benefit is paid to your lender, not your family.
