PMI stands for private mortgage insurance. When you get a conventional home loan and put down than less than 20 percent, you normally have to pay for this coverage. However, PMI doesn't pay off your loan if you die. In fact, it is intended more as a protection for your lender if you don't repay your debt. Mortgage protection insurance is an option if you want this type of death benefit.
When you pay down at least 20 percent of a home's price, you minimize the risk to the lender. When you pay less, the lender wants to insure its investment in the property. The PMI premium is about 0.5 percent of the loan amount. You pay it in monthly premium installments along with your mortgage payments. If you have very limited down payment funds, you can opt for a Federal Housing Administration loan, with which you can get funding with as little as 3.5 percent down. However, you must pay PMI for the life of the loan. When you put down 10 percent or more, you usually can cancel when the loan-to-value ratio reaches 78 percent.
Private mortgage insurance covers your lender's risk by picking up the slack if you fail to repay your entire debt obligation. The risk is higher with a low down payment because you don't have as much skin in the game. If you can't make your payments and the lender forecloses on the property, the insurance pays the difference between the amount owed on the loan and the foreclosure price. PMI isn't designed to protect your interests as the homeowner. Therefore, it doesn't alleviate your financial commitment if you lose your job. It also doesn't pay a death benefit to your survivors.
The MPI Alternative
Mortgage protection insurance, or MPI, is a common option if you want to protect your family's financial interests if you die unexpectedly. The specific benefits of your policy can vary. However, this coverage is intended to pick up your financial obligation if you experience job loss, disability or death. A standard MPI policy pays off the remaining balance on your loan if you die with a balance. This benefit is a huge relief for surviving family members who otherwise would have to absorb the loan payments.
When to Get MPI
MPI is a nice protection, but your perception of need depends on a few factors. If you have a fairly high certainty of job stability and you are in good health, the likelihood that the policy would pay out is minimal. A low remaining balance, a high amount of life insurance, and spouse with a high-income job also may mitigate the need for MPI. However, a young person with limited savings and a dependent family would get more value from this coverage.
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