We would all agree that buying a new house can be considered as one of the most important transactions in life. At the same time, it can be associated with a lot of stress and work. Imagine you have already found your dream house and now all that is left is to pack your boxes and go for your dream. But wait for a second, not so fast. That’s not the end but rather just the beginning of the story.
Of course, when purchasing a house with a loan, all of the possible situations considering the payments have to be taken into account. Here is when the importance of mortgage loan insurance enters the game. Not to confuse or frighten you let’s start with defining it and break down the important aspects and benefits of it.
Definition: To put it short, the primary purpose of mortgage loan insurance is a policy that ensures mortgages titleholder or lender from situations when a borrower defaults on payments, examples when the person dies or due to other circumstances is unable to meet the obligation of the signed mortgage contract.
There are several types of mortgage insurance, mainly those are private mortgage insurance (PMI), qualified mortgage insurance premium (MIP), and mortgage title insurance.
In order to have a complete understanding of those let’s break them all down and explore their importance.
Private Mortgage Insurance
This is a type of mortgage insurance which you would have to pay in case you have a conventional loan, or in a situation when you pay less than 20 percent purchase price of the house. Like every other mortgage insurance type, this insurance is for defending the lender rather than the borrower.
Qualified Mortgage Insurance Premium (MIP)
You will be required to pay this mortgage insurance type in case you have a Federal Housing Administration (FHA) mortgage. The rules in this type of insurance are different, which includes the rule that whoever has an FHA mortgage has to buy this insurance type, no matter their down payments.
Mortgage Title Insurance
This type of mortgage is for the protection against a loss, in case later it is determined that someone else rather than the seller owned the property at the time of the sale. In this time, it is required by the landers that buyers would provide a mortgage company as a beneficiary. This type also differs from the others in terms of it, you can also optionally pay for the title insurance policy, as a safeguard to their personal investment.
Now that we have a general idea of what does it mean to have a mortgage loan insurance and are also familiar with the main types of it, it’s time to dig deep into the reasons we would need it.
Benefits of MPI:
One of the main benefits of mortgage protection insurance is that the possibility of getting approved for a policy is higher, considering “guaranteed acceptance.” This aspect can be specifically advantageous for people either have difficulties paying for life insurance or cannot obtain a policy, someone who has health issues.
Disadvantages of MPI:
Considering the fact that the loan amount decreases the payoff amount of the mortgages it is being paid down, this cannot be beneficial for homeowners who are planning to make extra payments. This is also not a good idea and use of your money in case you paid for the mortgage with the proceeds of the sale of another house or if you have nearly paid off your mortgage.
It also has to be taken into consideration that MPI provides coverage only for the initial mortgage amount, in cases when you have taken home equity loans or home equity lines of credit.
Concluding points: Just like it is not recommended to take on a mortgage landing without shopping around, the same applies to MPIs. So, in case you have to deal with mortgage loan insurance you have to research the specific features and finances connected to MPI policies and make sure to check what aspects the policy does and does not cover.