When it comes to protecting your home and your mortgage, you may have come across the terms private mortgage insurance (PMI) and mortgage protection insurance (MPI). While these two types of insurance may seem similar, they actually serve very different purposes and benefit different parties in a mortgage transaction. If you have a mortgage on your house, it is important not to mistake PMI for MPI or vice versa. Understanding the difference and making an informed decision with a financial professional could end up making a world of difference to your loved ones.
Private Mortgage Insurance (PMI)
Private mortgage insurance, also known as PMI, is a type of insurance that is required by lenders when a borrower puts down less than a 20% down payment on a home. PMI is designed to protect the lender in the event that the borrower defaults on the mortgage.
PMI does nothing to prevent default and foreclosure from happening. Instead, it protects the lender’s investment by making the lender whole in the event that you default on your mortgage and they are forced to foreclose.
PMI is usually required for conventional loans, and the PMI premium is typically added by the lender to the borrower’s monthly mortgage payment.
It is important for buyers to realize that even though they are the ones paying for PMI, they are not protected by it and can still lose their home to foreclosure if they die or become disabled and are unable to pay the mortgage.
“PMI does nothing to prevent default and foreclosure from happening.”
Mortgage Protection Insurance (MPI)
Mortgage protection insurance, also known as MPI, is a type of life insurance that is designed to pay off the borrower’s mortgage in the event of the borrower’s death, or depending on the product, also upon disability or diagnosis of terminal illness. MPI is not required by lenders and is typically optional coverage that is purchased directly by the borrower.
The purpose of MPI is to provide financial protection for the borrower’s loved ones in the event of the borrower’s death or inability to work. The death benefit or living benefits of an MPI policy will pay off the remaining balance of the mortgage, allowing the borrower’s loved ones to remain in the home without the burden of making mortgage payments.
Mortgage protection insurance (MPI) creates peace of mind for the borrower.
“The purpose of MPI is to provide financial protection for the borrower’s loved ones in the event of the borrower’s death or inability to work.”
Differences Between PMI and MPI
In summary, the key differences between PMI and MPI include:
Coverage: PMI is designed to protect the lender in the event of borrower default, while MPI is designed to protect the borrower and their loved ones in the event of death, disability. That means that PMI does not stop the foreclosure process in the case of a default while MPI does stop foreclosure from occurring because it can completely pay off the mortgage.
Cost: The lender typically adds the cost of PMI to the borrower’s monthly mortgage payment, while the cost of MPI is always paid in the form of a separate premium.
Which Type of Insurance is Right for You?
Whether you need PMI, depends on how much you put as a down payment on your home. If you are putting down less than a 20% down paymenton a home, you will likely be required by the lender to purchase PMI. However, if you are concerned about the financial impact of your death, disability, or terminal illness on your loved ones and your mortgage, you may want to consider purchasing MPI as well.
As your insurance professional, I am here to help you understand your options and make an informed decision about the different MPI coverage options available to you. Contact me today to learn more about Mortgage protection insurance (MPI), and how it can help protect your home and loved ones from the possibility of foreclosure.