One of the greatest investments an individual makes in a lifetime is buying a home. This large investment is often accompanied by a mortgage. That debt can be overwhelming unless you have a plan to take care of it despite the unplanned events of your financial life, such as your untimely demise. In that event, would your family lose your new home if you did not have mortgage protection insurance or mortgage life insurance.
Basic Facts of Mortgage Insurance
Mortgage life insurance differs from traditional insurance because it allows anyone with a preexisting health condition or a healthy person to qualify for coverage. It can cover the insured for both death and disability. It also has a different beneficiary requirement. In a mortgage insurance policy the beneficiary is the mortgage company. They are the ones to be paid in the event of the untimely death or disability of the insured.
It can be purchased in terms of 15, 20, 30 or 40 years, which matches the terms found in most of today’s mortgages. It can cover every type of mortgage including adjustable rate, variable and balloon mortgages, first mortgages and refinanced mortgages.
The insurance can be classified as decreasing term. As the outstanding debt is reduced the death benefit decreases. Just like life insurance, mortgage insurance is valued based on your age, but it also factors the value of the home, the outstanding balance and the loan term in determining the premium to be paid. The younger the borrower, the lower the premium. The larger the outstanding debt the higher the premium.
Mortgage protection insurance has yet another feature that makes it convenient to purchase. It can be paid for monthly or annually. It can also be paid for with a one-time, single payment premium. If the buyer chooses an annual premium, his first payment will be paid in a lump sum at the loan’s closing and subsequent payments will be made monthly along with the mortgage payment. If a one-time premium is selected, 3 to 5% of the total loan will be paid at closing as the premium. This type of mortgage insurance usually stays in force until the loan reaches 78% paid. At that point if any premiums were overpaid, they are refunded.
PMI or LPMI
Mortgage life insurance is not to be confused with PMI or LPMI. Both of these types of coverage still protect the lender. PMI usually accompanies FHA mortgages and is there to give extra assurances to the lender in case the borrower defaults. It amounts to 1.33 to 1.75% of the value of the loan. Usually the borrower will pay PMI until the loan is paid down by at least 20% or 11 years has passed since the date of the loan. LPMI is slightly different. It is an inflated interest rate that is permanently attached to the loan covering any additional risk absorbed by the lender.
Pros and Cons of Owning Mortgage Insurance
The most obvious pro of having mortgage life insurance lie in the fact that in case the borrower becomes disabled and unable to work or dies, the mortgage still gets paid. Another pro is the ease with which a borrower can obtain this type of product. The borrower does not have to prove insurability. The con associated with this product is most commonly the fact that the beneficiary can only be the lender, making it impossible for the product to have a wider ranging benefit.
• Covers outstanding debt in a mortgage
• Covers first and second mortgages
• Covers fixed, ARMs and variable rate mortgages
• Has terms ranging from 15,20,30 to 40 years
• Usually will cover mortgages from 50,000 to 500,000
• Available to any borrower who qualifies for a mortgage
Having mortgage insurance in your arsenal of personal protection is just smart planning if you have an outstanding mortgage on a property. It plus whole life or term life insures your family doesn’t have to worry about their financial future. The family’s home is secure and so are family’s dreams for the future when these insurances are there to provide protection. The lender may be the direct beneficiary, but ultimately, it’s the family that gains the greatest benefit because they can continue enjoying their home.