If you take out mortgage insurance, it means either purchasing additional coverage from an insurance company or getting rid of it completely. In some instances, it's not practical to continue paying mortgage insurance anymore, most especially if you already paid 20 percent equity. It means that getting an alternative insurance option will bring more benefits than continue paying mortgage insurance.
In this post, you'll learn the good reasons why you have to take our mortgage insurance.
What Is Mortgage Insurance?
Mortgage insurance is usually a requirement of lenders because it protects them from default loans or if the borrower is unable to meet their obligation. Borrowers pay for mortgage insurance on a Federal Housing Administration (FHA) mortgage or United States Department of Agriculture (USDA) mortgage. It's a requirement if the borrower pays less than 20 percent of the down payment.
How Does It Work?
For homeowners, mortgage life insurance applies as a term life insurance, which pays off the mortgage if the borrower passes away. The death benefit is matched to the amount of the mortgage loan.
Benefits Of Getting Rid Of Mortgage Insurance
1. Avoid Suffering From Decreasing Benefits
Taking out mortgage insurance saves you money. It enables you to pay lower mortgage rates using other insurance options, such as term life insurance. So, you stop paying for mortgage insurance costs, which decreases your mortgage costs and interest. But, still, you gain peace of mind, knowing that you have a new insurance as a backup to cover your mortgage if problems arise (e.g. traditional life insurance).
Mortgage insurance policies usually have decreasing benefits over time as your mortgage loan decreases. However, your premium or the amount you pay doesn't decrease even if your insurance coverage decreases over time. Also, the money you pay for the mortgage is not practical, and you can use it instead to pay your other debts by taking it out.
It's a good thing that you can find an alternative to mortgage life insurance. Traditional life insurance is a great alternative to mortgage insurance due to the following reasons:
2. Save Money From Costly Premiums
The annual cost of PMI usually ranges between 0.5 to 1 percent of the total loan amount. For instance, the PMI cost of a $285,000 loan (average price of US homes) can reach up to $3,420 a year. As compared to a term life insurance, mortgage insurance is more costly overall.
3. Avoid Dealing With The Heavy Burden Of PMI Cancellation
When you reach or exceed 20 percent of your mortgage, paying the PMI is no longer necessary. But, dealing with the monthly burden is not easy. Aside from the monthly premium, lenders usually require borrowers to draft a letter to request PMI cancellation. Before the cancellation, a formal home appraisal is required, which could take several months. During the waiting period, you still have to pay the PMI.
4. Make Your Family Happy, Protected, And Well-Supported
People expect insurance companies to fulfill their promise, providing due benefits as problems arise. However, it's not always the case if borrowers don't meet their guidelines or terms. The proceeds are paid to the insurance company, making the lending institution appear to be the sole beneficiary.
Make your family happy, protected, and well-supported by checking other insurance options. This way, you'll have peace of mind, knowing that your family gets what they deserve based on the premiums you pay, and terms and benefits agreed.
5. Peace of Mind
Take out your mortgage insurance and resort to better options for your peace of mind. Make the right decision by comparing your options. It's crucial to choose the best insurance coverage and insurance provider so you can depend on them when you and your family need them.
Here are ways to choose the best insurance for you:
Mortgage Insurance FAQs
1. When do you give up private mortgage insurance?
To remove private mortgage insurance or PMI, a borrower should have at least 20 percent equity paid in the home. A borrower can ask the lender to cancel this insurance after paying the down payment of the mortgage balance (20 percent). If your balance is lowered to 78 percent, the mortgage servicer must eliminate PMI.
2. Can I avoid PMI without paying 20 percent down?
If you want to get rid of PMI without placing a 20 percent down payment for the mortgage, you can take out a government-backed loan, such as USDA Rural Development and Veteran Affairs (VA) loans that do not require it.
3. Will I ever get my PMI money back?
Generally, PMI can get some money if a borrower defaults on the loan. However, PMI does not cover the total value of the mortgage. When you go to foreclosure, the home sale covers a part of the losses of the bank. However, PMI can cover the rest.
4. Is PMI better than life insurance?
The two differ in features and benefits when it comes to policy coverage. You can't escape paying mortgage insurance if you can't pay down your mortgage balance to at least 80 percent, or unless you take out a federal backed up loan. Once all requirements are met, you can opt-out PMI and use life insurance instead. Life insurance provides fixed benefits and covers your mortgage if ever you pass away.
Taking out mortgage insurance can save you money. Seeking other options, like traditional term insurance, gives you more assurance and peace of mind that when you pass away, your property won't be given away, and your family won't suffer financially.