Purchasing a home is a major financial decision, and it s important to do everything in your power to meet the terms of your mortgage. To deal with financial situations that may arise unexpectedly, many homeowners take out mortgage insurance. Before you sign off on your next mortgage or refinance, here s what you need to know about mortgage insurance.
What Is Mortgage Insurance?
Like any insurance policy, mortgage insurance helps you plan for the future and provides you with options in the event that you can t make your regular loan payments. Mortgage insurance is available in two different formats geared toward very different purposes.
If you re researching mortgage options for your first home purchase, you ve probably wondered, "What is private mortgage insurance (PMI)?" This type of insurance protects the lender by making payments on the mortgage if the borrower can t. When homeowners purchase a PMI policy, it typically costs a small percentage of the base home loan, and borrowers pay a monthly premium.
Homeowners also have the option to purchase mortgage life insurance. This type of policy insures your mortgage in the event that you pass away or develop a major disability. Your lender will typically offer this kind of insurance.
When Mortgage Insurance Is Required
Depending on the type of policy you re considering and the terms of your loan, your lender may require mortgage insurance. Mortgage life insurance is never required, but a PMI policy often is.
If you opt to purchase a home without first paying a standard down payment of 20 percent, there s a good chance your lender will require you to purchase a PMI policy. The general reasoning behind this is that both public and private lenders want to protect their investment in the absence of a down payment.
Is Mortgage Insurance a Good Idea?
How much is mortgage insurance? It costs so much that many experts believe these policies are a bad idea. Though PMI generally costs around one 1 percent of the total loan, payments can be anywhere from $50 to $500 per month. Depending on the value of your loan, PMI payments can take a bite out of your monthly paycheck. Since borrowers don t receive any tangible benefits from PMI, some experts consider these policies to be money wasted.
Many people also caution against purchasing mortgage life insurance. Although you ll certainly want to protect your family and your property in the event of a death or disability, a mortgage life insurance policy doesn t offer much flexibility. Instead, many experts advise homeowners to pursue standard life insurance policies for these purposes.
How to Get Rid of Mortgage Insurance
If you do purchase a mortgage life insurance policy but no longer want to keep it, you may simply be able to cancel it. Getting rid of PMI, however, takes time. Once you ve built up 20 percent equity in your home, you have the option to call your lender and cancel PMI. If you don t take action, the policy will simply fall off the loan once you ve reached 22 percent equity, and you ll no longer be responsible for PMI payments.
When it comes to understanding mortgage insurance, mortgage lenders are the experts. Find a top lender near you and learn more about your mortgage options as you consider making a major investment in a new home.