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Private Mortgage Insurance: What You May Not Know and How That Can Hurt Your Family
WHAT IS IT?
Private Mortgage Insurance (PMI) is a privately purchased insurance program that protects a LENDER in the event that a homeowner defaults on a loan. Most lenders require a 20 percent down payment. Private Mortgage Insurance allows those who are unable to pay 20 percent to take out a mortgage by insuring the lender against the risks of foreclosure. The lender pays private mortgage insurance, but buyers who cannot pay 20 percent equity have to pay a higher interest rate to cover the insurance, or the buyer may pay the PMI premium as an addition to their mortgage payment. The FHA also offers a similar insurance that provides the same lack of protection for the homeowner.
A significant portion of all home owners are required to purchase PMI as a condition of being accepted for a loan, however, most do not understand what type pf of protection it offers, and most importantly, WHOM it protects. As a result, many new homeowners pass up the opportunity to purchase life insurance (mortgage protection) in the mistaken belief that they are already covered. This can result in tragic circumstances when an income provider dies or becomes disabled and the homeowner discovers, too late, that the PMI they were required to pay for ONLY protects the lender, DOES NOT pay off their mortgage or make the payments and; consequently, they can lose their home to foreclosure, be evicted, and lose all of the equity they had accumulated.
Not only does PMI not protect the homeowner, it is not even deductible as the result of a long standing IRS regulation. Congress is currently reviewing that status, however, differences in how such a deduction would work and election year politics makes it unlikely that any relief will be granted in the near future.
IS A HOMEOWNER REQUIRED TO CARRY PMI?
PMI is maintained at the option of the current owner of the mortgage (lender). In many cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. However, the degree of equity in the home is not the only factor that a lender may take into consideration. Note that the law in certain states requires that mortgage insurance be canceled under some circumstances.
CAN A HOMEOWNER RECEIVE A REFUND?
If all the mortgage insurance was financed at the time of origination and is canceled prior to its maturity, the homeowner may be entitled to a refund if the refundable option was chosen at time of origination. However, if the no refund/limited option was chosen, no refund is due.
SHOULD A HOMEOWNER PAYING FOR PMI CONSIDER BUYING LIFE INSURANCE?
If a homeowner wants to properly protect their mortgage they must do so by purchasing life or disability insurance policies that allow them to designate the beneficiary(s) of their choice. Life insurance is normally not a popular subject to discuss, nor purchase to make. You can’t watch it, drive it, swim in it, nor vacation at it; however it can make it possible for those you love and leave behind to enjoy those pleasures after you are gone. In this case the life or disability insurance can assure that you or your family does not lose your home if a tragedy strikes. Mortgage Protection which, of course, is life or disability insurance, is one of the few insurance options that make sense to most people because it can prevent a tragedy (the loss of a bread winner) from becoming the disaster of your family being homeless.
HOW DOES A HOMEOWNER GET THE BEST RATE FOR MORTGAGE PROTECTION?
Life and disability insurance are risk based products. That means insurance companies will only offer coverage to individuals that a low probability of a claim in the reasonably near future. Think of it this way: Would you be more inclined to loan money to someone who had a steady job and was careful with their money, or someone who had trouble paying their bills?
If you are in basically good health, and have safe personal habits, you can obtain coverage at surprisingly low rates. Significant health or personal habit issues will result in higher rates or a refusal to insure you. It is extremely important to apply while you are still insurable because it will be almost impossible to obtain coverage if you wait until you are no longer a desirable risk.
Finding the lowest rate is not as difficult as you might think. Some agencies use computer software that takes the information you provide and searches the insurance companies available in your state for the lowest rates. A few of those agencies even allow you to have personal contact with a representative over the telephone instead of dealing with the intrusion of having them come to your home. This provides you the opportunity to combine the lowest rate with the most convenience. Mortgage Services and Term Life Outlet are two organizations that will provide you that option.
SUMMARY
PMI is a beneficial tool that has helped millions of families buy their first home and beyond; however, like any tool, it is limited to the job it was designed to do: Protect the LENDER so that the borrower (you) can obtain a mortgage without a 20% down payment. If you want to protect your family against foreclosure, eviction, and loss of all of your equity, you must obtain separate Mortgage Protection.
About the Author: Mr. Osman is the pen name of a nationally recognized, award winning, life insurance Master General Agent and marketing expert. He has been consulting about mortgage protection and life insurance for almost twenty five years. For more information visit www.mortgageserviceswebsite.com (605-336-6644) or contact him at eric@ericosmanbooks.com.
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