Before venturing out and taking responsibility for getting a mortgage spanning several years, you must make sure you are safe, secure, and far from the clutches of foreclosure in case, you will not be able to make payments for whatever reasons. Many mortgage owners get this policy when they are old, or slowly unable to meet the demands of a breadwinner in the family.
According to Investopedia, this insurance policy has many similar insurances, namely Private Mortgage Insurance (PMI), Mortgage Insurance Premium (MIP), or a mortgage title insurance. However, Mortgage Protection Insurance (read more) at its core is defined as a policy that protects titleholder in any situation imaginable. This can be because of death, debilitation, or other reasons why the titleholder cannot meet their expected payments.
What Is A PMI?
PMI, or Private Mortgage Insurance, is a policy that can be done if your down payment for a mortgage is lower than 20%. Your lender can advise you to take this policy, especially when the debt still cannot be paid even through a foreclosure sale. However, please take note that this insurance is vastly different from mortgage protection insurance, especially with the rules, regulations, and how it works.
PMI will reimburse the lender when you are not able to pay the full fee for whatever reason. Unlike low mortgage protection, PMI will not protect the lender if they died, lost a job, or developed a disability that inhibits them from working. This policy will not be able to cover your debt if that happens.
What Is An MIP?
MIP means Mortgage Insurance Premium, a policy that protects lenders instead. Lenders that are backed by the FHA (Federal Housing Administration) are insured from high-risk borrowers. If you are a homebuyer with a smaller budget, you can get an FHA loan. They allow down payments as low as 3.5%. However, you will be required to obtain a MIP as well.
In other words, both MIP and PMI all benefit the lender. On the other hand, mortgage Protection Insurance (MPI) protects the homeowner, as it serves as the payment for the rest of the mortgage if ever the titleholder cannot meet the payment needs anymore.
What Is Mortgage Protection Insurance (MPI)?
This insurance functions like life insurance would. It can cover debts from a mortgage if the titleholder is deemed unfit to pay the rest of the fees and payables. The cost of this insurance is varied, depending on how much money a borrower takes out as a loan, what occupation they have, or if they have a disability. MIP can cover the debts before or after the titleholder becomes incapacitated, though not all insurances have this consideration.
If the titleholder dies during the mortgage plan, this policy will pay the debts in their place. This can save the beneficiaries the burden of taking the fees and continue paying it for the next couple of years. You can also avoid the possibility of your family losing their home.
MPI plans that cover a titleholder with a disability or one who lost their job will typically take over the debts only up to 2 years. They may also have a waiting period, but it still depends on the insurance company. However, this MPI will cover the principal and interest fees of their mortgage. It will not cover the miscellaneous expenses and other payables, like homeowner’s insurances unrelated to the home loan, property taxes, or homeowner’s association fees.
MPI does not need loan approval as well. Instead, it will have a fee added monthly to your payables.
Situations to Consider MPI
One pro of this plan is its very high approval rate. This is due to its nature being a guaranteed acceptance policy, which can work in your favor if you are looking to get a sure-fire loan. It is also the right choice for titleholders with disabilities that have to pay expensive life insurance or have been rejected by multiple policies before.
Sometimes, when the titleholder decides to get life insurance, the beneficiary may be a minor or have little to no knowledge about finances and money allocation. Thus, life insurances that allocate the money to the beneficiaries may prove confusing and overwhelming. They will need financial advisers who will cost them a hefty sum of money if they do not know how to manage the sum.
This is where MPI steps in. MPI will decide for them, and that is placing the money in the budget for the mortgage. The beneficiary will not have to mull over home loan fees and instead focus on other payables. Getting other policies and failing to pay them can affect your credit significantly, and you can even have a chance to lose your home. With an MPI, the benefits carry over even after your death (mostly when you are gone) until it runs out.
Another example is having a high-risk job. This policy can make sure your mortgage will be well-taken cared of if you lose your life or become disabled. It also acts as disability insurance.
Situations to Avoid MPI
One situation an MPI is undesirable is when you are just about to pay off your mortgage loan. In this situation, the policy becomes useless and only adds to more of your monthly payables. Instead, you can save your money in the bank or invest it somewhere to get a higher return.
Another thing to look out for is the type of loan you took out. If you have a home equity loan and wish to get an MPI, this insurance only covers the mortgage’s initial amount.
Homebuyers and owners that plan to pay off their mortgage early also see no benefit from getting an MPI. As they continue to pay off the mortgage, the loan pay-off becomes decreases significantly, which defeats the purpose of obtaining an MPI in the first place. However, there are newer policies that disallow the decline of potential pay-outs. This is called the level-death benefit.
Take note that MPIs pay your lender directly. That means it cannot provide any financial assistance to your loved ones if you died or had been incapacitated—except the mortgage. This will prompt you to get another similar insurance policy that directly covers your loved ones’ financial assistance. This can be in the form of term life insurance, where the beneficiaries can get the money and decide where to allocate said money.
They can decide to put it in the mortgage note to lose a home (especially when it’s about to get paid off), pay for hospital bills, daily payables, or decide to invest it in a business or asset. This choice becomes more desirable than MPI because it provides beneficiaries with the freedom of choice.
MPIs also vary in prices, unlike other types of insurances. You cannot get an exact quote online, and each company you tap into all have different policies and rates.
Is Mortgage Insurance Worth It?
Despite having a lot of cons, MPI still fits some situations you might find yourself in. As we have said previously, MPI can be beneficial to the disabled or beneficiaries left behind that will need to shoulder the debt. This can be especially damning if you have paid half of the mortgage loan and require only a bit more to complete it. Since you did not pay off 20% or lesser, the lender will not reimburse the money, which will invalidate you from a PMI.
We can say PMI is a worthy investment only if your beneficiaries have no other options as to a home. The payment will be a significant deduction to their already current payables, monthly bills, school fees, etc. And since the house is a priority investment, it is only natural to protect it from foreclosure. It can ensure you do not lose a home and an investment in the long run.
However, if you do not have a large pool of savings, paying for an MPI and life insurance can prove to be too much. It is up to you as a homebuyer to decide which to prioritize and apply for a loan.
If you find MPI isn’t for you, there are other insurances, policies, and methods to consider as well. One of those methods is the DIME (debt, income, mortgage, education) method.
Debts get passed on to your family when you lose your life unexpectedly. This happens to people who did not invest in life insurance and other policies that cover funeral fees, student loans, and credit card loans. This element should be considered and is one of the most critical aspects of the DIME method.
Your income includes your net worth, and in relation, your life insurance should be able to cover what your income should have in the next ten years or so. For example, if you total $100,000 per year, multiplying that by ten makes it $1million. That is how much your income should have been in 10 years, all to cover everyday expenses, bills, etc.
Add what is left of your loan and add it to your debt and income.
If you have children, you need to oversee their education until high school or college. A state university might net around $100,000 per child, while a private one will cost you a lot more. Your child can consider taking out a student loan, but those have high-interest rates, and some cannot ensure a scholarship. When you have added all the elements, the sum of it is the amount your insurance needs to cover. If it sums to $5 million, then the DIME formula has shown you how much your insurance needs to cover.