Mortgage insurance: What are its different types?
Primary aim of mortgage insurance is to protect the lenders in the event of home loan default. Borrowers purchase this insurance and pay the premiums; in turn, insurance companies promise to make the remaining mortgage payment in case of loan default. In other words, the lender becomes the beneficiary of mortgage insurance policies.
Types of mortgage insurance
All the mortgage insurance policies can be broadly categorized into 2 types, namely, (1) Private Mortgage Insurance and (2) Mortgage Protection Insurance. Go through the following lines to know about these 2 types in details
(1) Private Mortgage Insurance (PMI)
If you’re not able to afford 20% down payment on your mortgage loan, then you may require purchasing a Private Mortgage Insurance or PMI. This insurance policy protects your lender against loss if you default on your loan repayment.
There are 2 types of PMI, which are described below.
(i) Borrower-paid PMI: It is a type of PMI wherein the borrower pays the insurance premium. Usually, you’ll have to purchase it if you’re unable to make the required down payment on your home loan. It is also referred to as ‘Traditional Mortgage Insurance’ or BPMI (Borrower-Paid Private Mortgage Insurance).
(ii) Lender-paid PMI: When lender pays for PMI, then it is referred to as LPMI (Lender-Paid Private Mortgage Insurance). However, lender recovers the premium cost by adding it to the mortgage loan interest. Usually, this insurance is purchased by a lender in case of high loan-to-value mortgage.
(2) Mortgage Protection Insurance
Mortgage protection insurance covers your home loan payments when you’re unable to make your monthly mortgage installments. Owing to its coverage, this insurance is sometimes referred to as mortgage payment protection insurance. Mortgage protection insurance can be divided into 3 types, which are discussed below.
(i) Mortgage Life Insurance: The benefits of mortgage life insurance are somewhat similar to any other life insurance policies. This mortgage insurance is meant to pay off your remaining mortgage loan in the event of your death. If you purchase this insurance, then it’ll save your family members from losing their home.
(ii) Mortgage Disability Insurance: Mortgage disability insurance promises to make your monthly home loan payments in the event of your physical disability. However, you can avoid purchasing this insurance if you have other types of disability insurance policies. The amount of coverage is usually dependent upon your salary at the time you become disabled; usually, the coverage amount varies between 50-70 % of your salary.
(iii) Mortgage Unemployment Insurance: It is quite obvious that you’ll face difficulty in making your monthly mortgage payments in the event of your sudden job loss. You can have mortgage unemployment insurance that can cover your monthly home loan payments if you suddenly become unemployed.
Some insurance companies may offer combined mortgage protection insurance, wherein you get the benefits of both mortgage unemployment insurance and mortgage disability insurance. Sometimes, mortgage disability insurance is offered as a rider with mortgage life insurance. Therefore, it is advisable that you clearly understand the types of coverage before purchasing your mortgage insurance.
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