What are the types of mortgage insurance and how do they work?
If you are not able to afford at least 20% down payment while taking out a mortgage loan, then you may have to purchase Private Mortgage Insurance. It protects the lender in the event of loan default. However, you may also buy a mortgage insurance policy to cover up the balance payments in the event of your death or disability. Before purchasing a policy, you should know how does mortgage insurance work. It will help you to understand the types of mortgage insurance in a better way.
How does mortgage insurance work
Mortgage insurance is actually a protection for the lender in case of loan default. Like any other insurance policy, mortgage insurance is also a type of agreement between you and your insurance company. You need to purchase adequate mortgage insurance and pay the monthly premium on time; in return, your insurance company agrees to pay the mortgage balance in case of loan default; it may happen when you’re unable to make your monthly payments due to unemployment, disability or in the event of your death.
Types of mortgage insurance
There are primarily 2 types of mortgage insurance policies, namely, (1) Mortgage Protection Insurance and (2) Private Mortgage Insurance (PMI). These policies are discussed below.
1. Mortgage Protection Insurance
It covers your home loan payments when you’re not able to afford your monthly mortgage installments. Insurance companies usually offer 3 types of mortgage insurance policies as discussed below.
- Mortgage Disability Insurance: Your mortgage payments are taken care of by insurance companies if you’re unable to make your monthly installments in case of your disability.
- Mortgage Unemployment Insurance: If you suddenly lose your job, then this insurance will cover your monthly mortgage payments for a certain period of time or till you get a new job.
- Mortgage Life Insurance: Like any other life insurance policies, mortgage life insurance covers your payments in the event of your death.
2. Private Mortgage Insurance(PMI)
You require this insurance policy when you cannot afford 20% down payment while taking out a mortgage loan. There are 2 types of PMI as given below.
- Lender-paid Private Mortgage Insurance: It is referred to as Lender-Paid Private Mortgage Insurance (LPMI) when a lender pays the insurance cost. Usually, the premium cost gets added to the mortgage loan interest that the borrower needs to pay.
- Borrower-paid Private Mortgage Insurance: A borrower may need to purchase this insurance when he/she is unable to afford the required down payment on the mortgage loan. For this reason, it is referred to as Borrower-Paid Private Mortgage Insurance (BPMI).
While purchasing mortgage protection insurance policy, you should consider the liabilities that your spouse and children will face in your absence; it will help you to realize that you can get some added benefits if you buy a life insurance policy. Life insurance offers more flexibility as your beneficiary can utilize the money to repay other debts rather than paying off a single debt, that is, mortgage.