Explaining the Basics of Mortgage Insurance

Explaining the Basics of Mortgage Insurance

There are two basic types of mortgage insurance - private mortgage insurance and mortgage life insurance. But do you know which one is right for your financial needs?

Taking advantage of low mortgage rates attracts many first-time home buyers to the real estate market. However, you may forget some aspects of home ownership in your rush to jump into the market. One of the essential aspects of buying a new home is the mortgage insurance. Unfortunately, many inexperienced home buyers are not familiar with the two main types of mortgage insurance or the type that they need. Private mortgage insurance is ideal for some home buyers while Mortgage Life Insurance may be better suited for a different type of homeowner. Following is a brief description of each type of mortgage insurance and they mean to you.

Mortgage Life Insurance
Mortgage life insurance is a type of insurance that is available to home buyers if they want their mortgage paid off in the event that the person making the payments suffers a debilitating injury, incapacitating disease or death. At first, buying this type of mortgage insurance may seem helpful. However, these incidents occur so rarely that it may not be the best option for your financial needs. This type of policy may come in handy, however, if you are already in poor health because your premiums on a mortgage insurance policy are typically much lower than on a normal life insurance policy.

Private Mortgage Insurance
This type of insurance is more suited for the lender's protection. However, it may be required if you are buying a house and you cannot put a down payment of at least 20 percent. If you default on your mortgage and the lender is unable to sell your home for the amount of money needed to pay it off, your private mortgage insurance policy comes into effect.

A private mortgage insurance policy premium is based on the value of your loan. It is usually about one-half of one percent of the total money that you borrow. For instance, if you finance a home that costs $150,000 and you put a 10 percent down payment towards the price, you would finance $135,000. Your private mortgage insurance (or PMI) annual payments would be about $675.00. That comes out to about $56.25 per month. Fortunately, once you have paid down your mortgage to less than 80 percent of the home's original market value, you can usually cancel the PMI and save that money.

If you want to cancel your PMI, you must call the lender and ask to cancel it. They will not do it unless you ask. There may be some rare cases in which you are not allowed to cancel, too. You can get more information about the reasons by speaking with your realtor or your lender.

Although both of these mortgage insurance policies protect different parties, they are both designed to protect an investment. With PMI, the mortgage company offers it to protect the money they have invested by loaning to you. With mortgage life insurance, you can feel better knowing that your mortgage is taken care of in case you die or suffer some other major catastrophe. You never know what's going to happen in life and taking a few simple precautions can help you prepare for those bad events.

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