Mortgage insurance is one of the most important things to purchase when you buy a new home. There are two types of mortgage insurances and knowing the differences between them can make a huge difference for your budget and your lifestyle needs. The first and most popular type - Private Mortgage Insurance (or PMI) - is ideal for several reasons while Mortgage Life Insurance is better for others. Following is a brief explanation of each to help you make a decision when you buy a new home.
Private mortgage insurance is not for your protection. Instead, it is for the lender. If you are buying a home and you are not able to put down 20 percent as a down payment, the lender requires this insurance to be put in place. The insurance is there to insure that the lender protects their investment incase you default on your loan and they cannot re-sell your home for enough money to pay it off.
The insurance price varies but it is usually about one-half of one percent of the loan amount. For example, if you are buying a home for $150,000 and your down payment is 10 percent, or $15,000, on your $135,000 loan your private mortgage insurance fee would be about $675.00 annually, or about $56.25 a month. Once your mortgage has been paid down to less than 80 percent of your home's original value, the lender should cancel the private mortgage insurance. In the past, lenders have not cancelled the private mortgage insurance when the mortgage has been paid down. However, because of the Homeowner's Protection Act in 1998, you may call the lender and have them cancel the PMI. There are a few reasons why your PMI may not be cancelled, but those are rare cases. Your realtor can give you the specific and detailed information concerning that.
This type of insurance is offered to you if you want your mortgage paid off in case of death, a disability or an incapacitating disease. This offer usually comes in the mail from your lending institute or a company affiliated with your lender. This may seem like a good idea at the time, but buying insurance based on a narrow reason could end up costing you more when there are other ways around it. If something did happen to you, your spouse or dependents may be better off just making payments on your mortgage instead of paying it off. When it comes to deciding on what type of life insurance you get, take into consideration your entire financial responsibilities and if it's worth getting mortgage life insurance. If your health is poor, you might have to pay higher premiums with a life insurance policy. In cases like that, it might benefit you to get mortgage life insurance.
These two types of mortgage insurance are designed to protect an investment. In the case with PMI, the mortgage company wants to protect their investment in the money they've loaned you to buy a home. In the case of mortgage life insurance, you might get peace of mind knowing that your family is taken care of if you pass away or something else happens. Either way, it's always good to be protected for life's big events that are always unexpected.
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