When you are in the process of purchasing a home and obtaining a mortgage, be sure you understand what people are talking about when they talk about mortgage insurance.
First of all, there is PMI, Purchase Mortgage Insurance, which the lender requires some buyers to take out (and pay for) on their mortgage in the event they are unable to continue to make the payments on their home.
If a buyer wants to buy a home by putting less than 20% down, the lender can insist on this type of insurance to protect himself. The problem most banks have is that the homeowner does not have enough invested in the home if paying the mortgage becomes too expensive. In a low or no money down mortgage, the borrower has risked no substantial amount that would compel him to protect his investment as much as he can.
So the lender insists upon an insurance policy that will protect him if the borrower is not able to continue his mortgage payments. The lender is the beneficiary of this type of mortgage insurance.
The other type of policy is for the borrower who is concerned that his family will not be in a position to keep the home if anything should happen to him.
With this type of insurance, your family will not have to be concerned about keeping up the home loan payments in case anything happens to you, the primary breadwinner.
If you want to protect your family in the event of your death, you would subscribe to mortgage life insurance, which would pay off the outstanding balance on your mortgage in the case of your death. Decreasing term mortgage life insurance is the one most people buy, since mortgages go down and therefore it is not needed to keep the initial loan amount as the policy principal. If you begin with a $200,000 mortgage, after a few years you would have reduced the principal, so you do not want to keep paying the premiums on a $200,000 policy.
In the instance of mortgage disability insurance, the amount of the monthly home loan payment will be guaranteed for the allowable period of the disability.
The difference in these policies makes it clear that you have to understand what your lender is discussing. Some lenders may be anxious to sign you up for mortgage life or disability insurance because they can make a commission from it, but if you are in a situation with a low down payment loan, your bank may only be talking about protecting his interests, not yours, when he discusses mortgage insurance with you.
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