What are the important things to know about mortgage insurance?

Mortgage insurance is an insurance that ensures that your mortgage is paid off in case of your death in the policy term while the mortgage is not fully paid. This means that if you die during the mortgage policy term, the balance is paid off and your family gets a debt free home.

Features of mortgage insurance

The following are the unique features of mortgage insurance –

• The borrower gets no benefit from mortgage insurance. The only party to benefit in case of a claim is the lender.

• Mortgage insurance is only required if the borrower pays less that 20% of the home equity.

• The lenders require the borrowers to have mortgage insurance on the home until the borrower reaches 20% of the home equity.

With the rise in unemployment and the stagnation of the job market, foreclosures are on the rise. This has resulted in mortgage insurance companies tightening their guidelines. Now, many insurance companies have completely stopped to offer mortgage insurance as they cannot afford to pay off the premiums they secured.

Types of mortgage insurance

There are basically 2 types of mortgage insurance in the US. These are -

1. Mortgage protection insurance: Mortgage protection insurance covers the payments for your home loan if you’re unable to pay your monthly mortgage installments. Mortgage protection can offer a considerable amount of protection on your home. There are 3 types of mortgage protection insurance which insurance companies offer to their customers –

• Mortgage disability insurance: In mortgage disability insurance, the responsibility of your mortgage payments is taken by the insurance companies if you’re unable to pay your monthly mortgage installments due to disability.

• Mortgage unemployment insurance: The mortgage unemployment insurance will cover your monthly mortgage payments in case of your sudden job loss. The coverage will be for a certain period of time or till you get a new job.

• Mortgage life insurance: Mortgage protection life insurance covers your monthly mortgage installments in case of your death during the mortgage repayment period.

2. Private mortgage insurance: Private mortgage insurance (PMI) is provided by private insurers to protect lenders against loss if a borrower defaults. PMI is usually required when a buyer pays less than 20% equity on a house. The benefits of private mortgage insurance are –

• Buy the home you want: Buyers with less cash in hand can have greater access to homeownership. PMI allows buyers to purchase a house with a down payment of a little as 3% depending on credit history and state laws.

• Save money: You can also use PMI and save your available cash for other expenses like home furnishings, education, etc. PMI also allows you to close on your loan with lesser cash. A financed or monthly premium plan may reduce closing costs even more.

Current federal tax laws actually make it smarter to borrow more by placing less down on your home. So, it is advisable to consult your tax professional before taking mortgage insurance.