Mortgage Insurance Defined

Two forms of insurance come to mind when speaking about mortgage insurance: (1) private mortgage insurance and (2) mortgage life insurance. The only thing that these two types of insurance have in common is that an insurance company makes a payment to a beneficiary. Other than that, these two forms of insurance are vastly different and should not be confused.

Private mortgage insurance is insurance that the lender collects (or is payable to the lender) in the event that a foreclosure and sale of the mortgaged property does not wholly restore the lender. In order for this series of events to occur, a mortgagor (the person or entity that borrowed the money) has to default on his/her/its loan. After this occurs, the mortgagee (the person or entity that made the loan) has to go through all the appropriate steps and notices to try to collect on the loan.

Private mortgage insurance may be payable up front (meaning at the time of the loan) or it may be spread out over the life on the loan and incorporated into the loan payments. For something like a home purchase, many borrowers utilize the latter option. The cost of private mortgage insurances varies and depends upon the amount of the loan, the type of loan, the loan terms, the percentages of the property that is financed, the amount of coverage, and the frequency of the payments, to name a few. As such, you should talk to your lender about the available options in order to get an accurate cost for the private mortgage insurance.

Mortgage life insurance, on the other hand, is a form of life insurance. Basically, in the event of your death, the outstanding balance of your mortgage is paid in full by the insurance company. There are limitations to such insurance. Thus, you cannot continue to refinance your home or take a second mortgage and expect the insurance to cover such loans. The insurance usually covers only your primary loan and the balance of such a loan.

Many people do not take out this kind of insurance for one of several reasons. First of all, many people do not live in a house long enough for the mortgage to be paid in full and therefore, the insurance could be considered a waste of money. Second, many times the life insurance policies that people have are more than sufficient to pay off the home mortgage and give the beneficiary enough money to live. Last, a home can always be sold and thus, the mortgage obligation that attaches to the home can be repaid with enough money left over to purchase another dwelling.

It is important to know the differences between these two types of insurance so that you obtain the appropriate one for your situation.