There are two different types of mortgage insurance that you may hear about in the home buying process. These two insurance options are PMI (private mortgage insurance) and mortgage protection insurance.
They both offer two different types of protection and it’s important to understand the difference between the two.
Mortgage Protection Insurance
You purchase this type of mortgage insurance when you buy your home. It will usually need to be purchased within a certain time frame after closing and some companies will allow you to purchase it as much as five years later.
The idea behind this is simple. You pay a premium and if you die during the time then the insurance pays out a death benefit. It can be used as a life insurance program that will give you a special benefit since you have a mortgage.
The type of benefit you will get will depend on the type of policy you purchase. This type of insurance has also evolved over the years.
Today, many policies are designed to cover the full amount of the original mortgage, no matter what you still owe on it.
This means the beneficiary can use the remaining money for anything else. If you pay off the mortgage early, you still get to keep coverage until the term of the policy expires.
Another benefit of this type of insurance is that you also have protection if you lose your job or become disabled.
You do need to read the fine print on a policy if this is something that you may need your policy for down the road.
This insurance won’t be required and if you are in good health and feel secure in your job then you may not want to purchase this type of insurance.
Another benefit of mortgage protection insurance is that it usually has guaranteed acceptance so the likelihood of getting approved for the policy is high.
This can be a good option for those who have health issues, and either can’t get a life insurance policy or can’t afford one due to high rates.
However, it is paid to your lender and won’t give other financial protection like life insurance does. If you aren’t able to get disability insurance because you are at a high-risk job then you can get mortgage protection insurance and know that you can make your mortgage payment if you get injured.
PMI is used to reimburse your lender if you default on the loan and the home isn’t worth enough in order to repay the debt with foreclosure.
This insurance won’t have anything to do with disability, death, or job loss and won’t be able to pay your mortgage if this happens to you.
PMI may be required if you are putting less than 20% down. When you reach a certain point, you can contact your mortgage provider and let them know you want to discontinue the PMI.
At closing, the lender must let you know how much time it will take for you to be able to cancel it.
Even if you don’t request the cancellation, the lender will need to automatically cancel once the ratio gets to 78%. The average rates for PMI will range between .55% and 2.25% depending on different factors.