What is Mortgage Protection?
Mortgage protection is life insurance that pays off your mortgage when you die. Mortgage protection policies also often include other benefits that cover disability, unemployment, critical illness, and terminal illness.
Most people do not have adequate life insurance coverage, and when they die, their loved ones are forced to move out of the home or let the home go into foreclosure shortly after the death of a loved one.
Families work their entire lives to purchase, maintain, and improve the most expensive asset they have – their home. And yet, when a loved one dies, those left behind find out quickly they never owned it in the first place…the bank owned it…they were merely renting it.
If you recently purchased or refinanced your home and received mortgage protection letters in the mail, this article will help you understand your options.
But I have PMI insurance on my loan!
PMI is an insurance policy that protects the lender if you fail to make the mortgage payments on your home. It also protects the bank if they repossess your home and have to sell it for less than the remaining balance you owe on your loan.
If you put down less than 20% on your home, the bank will automatically include PMI in your mortgage payments. If you buy a $100,000 home and only put down $10,000, you will have to pay PMI until your loan balance gets down to 80% (assuming your home value remains the same).
Why do banks require PMI if you put down less than 20%?
There once was a time when banks would not give you a loan under any circumstances unless you put down a large amount of money as a deposit…often 20% of the loan value.
With PMI, lenders are now willing to take on loans with low down payments, because the PMI assures they won’t lose money. By adding PMI to your loan, it makes it much easier for you to purchase a home with a less than 20% down payment.
How can I stop paying PMI?
When you get to the 80% loan to home value ratio, you can then request the PMI on your loan be dropped. You will just need to submit paperwork to your lender showing your loan balance is now 80% of the value of your home.
As you are paying off your mortgage, your loan balance is declining. At the same time, your home value is increasing. So, in our example above, you bought a $100,000 home, put down $10,000, and have $10,000 remaining to get to the 80% level at which you can drop your PMI. If you pay down your mortgage $5000, and your home value increases to $106,000, then you would meet the 20% requirement and be able to drop your PMI.
So, why would I need mortgage protection insurance?
To be honest, you will not need mortgage protection insurance for yourself; you will be dead, and it won’t matter to you! It will, however, matter greatly to the ones you leave behind. If you love your spouse, partner, and family, you will want to make sure they can keep the home after your death.
Having mortgage protection assures your loved ones can stay in your home after your death. Losing a loved one is traumatic enough, without adding the additional trauma of losing the home you have been living in for many years.
Every adult we know has lost a loved one, and it was always a surprise. None envisioned one year, three years, five years, or 10 years earlier that a friend, relative, or loved one would die unexpectedly. It happens every day, and families are torn out of their homes and communities when they can’t pay their mortgages. Mortgage protection prevents this from happening.
But what about the old kind of mortgage insurance my bank used to offer?
This mortgage protection is rarely offered anymore by banks, since the stock market and housing market crashed in 2008 and 2009.
This old mortgage protection coverage was called the declining balance mortgage protection insurance. As your mortgage balance decreased, the life insurance balance within the mortgage protection also decreased at the same rate.
You would think this would save you money as the mortgage balance went down. You would think your premiums would also drop in relation to the decreasing mortgage balance; this is not the case.
For example: Let’s say you had one of these declining balance mortgage protection insurance policies and the premium was $75 a month. You would pay $75 a month, even as your balance dropped over the length of your loan, often for the full 30 years of your loan.
This mortgage protection was also attached to the loan. If you sold the home or refinanced your home, this mortgage protection would go away. So, if your health had changed significantly and you tried to get another mortgage protection policy, you might be ineligible for any new protection.
So, what is the best mortgage protection?
The best mortgage protection fits in your budget today, protects your family, protects your home, and assures the insurance money is delivered to the beneficiaries of your choice when you die.
The best mortgage protection policies also have living benefits that protect your home should you become ill, disabled, or unable to work.
The best mortgage protection should also be transferable from home to home, so if your health changes for the worse, you don’t lose your important mortgage protection coverage.
The best mortgage protection should also be a separate policy from your regular life insurance. This allows you flexibility with your budgeting and allows you to drop unnecessary life insurance policies when they are no longer needed. This will help you better fit mortgage protection and life insurance into your budget.