Do You Need Mortgage Insurance?

Decide whether you need mortgage insurance.
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Getting a house is exciting; thinking about insurance isn’t. You know you need homeowners insurance to repair or replace your home, your belongings or to cover you against lawsuits in case someone gets hurt on your property, but other types of insurance are associated with your home, too. You may need mortgage insurance, or you may not. Understand the different types of mortgage insurance to decide.

Private Mortgage Insurance

Sometimes, private mortgage insurance, also called PMI, is called mortgage insurance. You typically have to pay PMI if you put down less than 20 percent of the purchase price of your home. PMI protects the lender in case you default on the loan. As soon as your loan-to-value ratio goes below 80 percent, you can typically cancel your PMI. If you don’t notice when you qualify to cancel your PMI, by law, the lender must cancel it for you when the loan-to-value ratio falls to 78 percent. PMI typically costs about one-half of one percent of the loan amount, according to Walter Updegrave, contributing columnist. You typically pay this in monthly premiums.

Mortgage Life/Protection Insurance

Another type of mortgage insurance is mortgage protection insurance, also called mortgage life insurance. It’s also known as MPI or mortgage payment protection insurance, or MPPI. This type of insurance is voluntary on your part; you are not required to buy MPI. What MPI does is to repay your mortgage in case you die, become disabled or loose your job. Updegrave does not recommend you buy this type of insurance because he says it’s usually not a good idea to buy any type of insurance for a single liability. For example, you are probably better off to buy a life insurance policy that covers your dependents on all issues, rather than only covering the mortgage. Also, MPI is a declining-benefit policy, meaning that as you pay your mortgage, the policy is worthless.

Reason to Buy MPI

The only time Updegrave recommends mortgage life insurance is when you are in poor health and face high premiums or if you don’t qualify at all for life insurance. People who work in high-risk jobs who can’t get disability insurance may benefit from MPI. When you fill out the application for MPI, you aren’t asked a whole lot of questions, Kevin M. Lynch, assistant professor of insurance at The American College in Pennsylvania, told, meaning it’s more likely for you to be approved. Always check the policy, though, for restrictions on pre-existing conditions.

Advice on Buying MPI

If you do decide to buy MPI, shop around for the best deal instead of simply going through your mortgage company. Check the rating of any insurance company you pick to determine the company’s financial condition.

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