What is Mortgage Insurance and How does it Work?

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If you’re a homeowner, you’ve probably been on a crash course to learn all the various terms and conditions of getting a mortgage and closing on a house. From escrow to deed-in-trust to points to PITI, you likely haven’t had to memorize so much jargon since high school geometry. We haven’t even talked about insurance.

There are several new types of insurance you’ll need to know about and consider as a homeowner. These include homeowners’ insurance, which protects your home and its contents against loss in case of a fire, theft, or another event, such as a storm. Other coverage you may not have heard of before is mortgage insurance, of which there are two kinds. At TwinCity Lending we will help you understand these various insurances, and walk you through how mortgage insurance works.

What is Primary Mortgage Insurance (PMI)?

Primary mortgage insurance, or PMI, is a policy you are required to have by most lenders if you owe more than 80% of the balance of the mortgage. This mortgage insurance protects the lender should you default on the loan. PMI allows lenders to make riskier loans, which means that more people can get approved for mortgages and become homeowners.

Loan applicants who have a down payment of at least 20 percent of the home’s selling price have a statistically lower risk of having trouble making mortgage payments or defaulting on their loan. But it can be difficult for many home buyers to save up tens of thousands of dollars for a 20-percent down payment. PMI makes it possible for people to buy homes with as little as three percent down, or in some cases, no down payment at all.

PMI is paid directly to your lender every month as part of your mortgage payment. You pay a PMI insurance premium each month until the amount you owe on your loan drops below 80 percent of your home’s current value. As you pay your mortgage principal down — and your home’s value goes up — you will reach this threshold and can petition to have PMI removed from your loan. After years of on-time mortgage payments and getting your loan-to-value percentage to 80 percent, you will have joined the group of lower-risk homeowners and no longer need to carry PMI.

If you want to buy a home but don’t have a sizeable down payment, talk to us at TwinCity Lending about private mortgage insurance. PMI is an additional monthly cost, but it can make homeownership possible. We will work with you to calculate how much your monthly payments will be and help you determine how much home you can afford.

The other type of mortgage insurance protects you, the homeowner, should you lose your job, become disabled, or die. This mortgage insurance is called mortgage protection insurance, or MPI, and it can be a good investment for some homeowners to ensure they can make their mortgage payments or do not lose their homes if an unplanned event or accident occurs.

What is Mortgage Protection Insurance (MPI)?

Insurance

After you signed all the mortgage paperwork and moved in, do you ever wonder what would happen to your home and your family if you became injured, disabled, or died? How would your family pay the mortgage if you lost your job, could not work, or were not around? If you’re worried about this situation, Mortgage Protection Insurance (MPI) may be right for you.

Mortgage Protection Insurance is an insurance contract, similar to life insurance or disability insurance, that will pay a percentage of your mortgage payment for a certain period if you lose your job or become disabled. Most MPI also pays the balance of your mortgage directly to the lender — paying off your loan — if you die. That means your family will then own the house free and clear, and not have to worry about a mortgage refinancing or home sale after your death.

MPI can be useful for people who have risky jobs or health issues that make it more difficult or more expensive to qualify for life insurance — which many people also use to pay off their mortgages in case of their death. Unlike life insurance, however, mortgage protection insurance is easy to obtain. Many people with chronic health conditions or a previous catastrophic illness such as cancer are not approved for life insurance, or the premiums are too high to be cost-effective.

Other times, life insurers won’t issue a policy to someone whose job puts them in higher-than-average danger. Without the ability to get life insurance, your options for a payout that would ensure your family can stay in their home after you die can be slim. Mortgage Protection Insurance provides a solution.

If you’re wondering how much mortgage protection insurance is, the answer is that it varies. The cost of mortgage insurance varies from person to person, just as life and disability insurance do. The benefits of your policy also differ — MPI is not a one-size-fits-all product. You can opt for benefits that pay a smaller amount per month to assist with mortgage payments for a longer period, or a larger monthly payment for a shorter period, for example. Everyone’s financial and family situation is different, so MPI policies are flexible to help protect your unique needs.

At TwinCity Lending, we offer mortgage protection insurance to our clients as part of our portfolio of services. Mortgage protection insurance helps give you the peace of mind that you or your loved ones will have the stability of your home even if tragedy strikes.

Contact us at TwinCity Lending to discuss these two types of mortgage insurance and how they will impact your ability to buy a home. If you’re already a homeowner and you’re interested in adding MPI to protect your home and your family, we can help you with that too. Give us a call and let our experienced and friendly staff help you make sense of the mortgage jargon and protect your most significant investment.

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