When purchasing a home with less than a 20% down payment, it is common for lenders to require you to pay for private mortgage insurance (PMI) or lender’s mortgage insurance. However, many people are not clear on what that insurance is covering.
Private mortgage insurance protects the bank or lender if you default on your loan. This means that if the main income earner in your family becomes unable to pay the mortgage, your family could still lose their home, but the bank or lender would be protected. Banks require you to have PMI coverage so that they will not lose money if you are unable to make your mortgage payments. Banks sometimes don’t explain private mortgage insurance to their clients, which leads to misunderstandings about what the insurance covers.
Many people mistakenly believe that private mortgage insurance protects them and their family from losing their home, but this is not the case. If the main income earner in your family becomes unable to work or passes away, your family will still be responsible for making the mortgage payments; if unable to do so, your family could lose their home. Families who mistakenly believe that they are protected by PMI could end up in serious financial trouble.
Mortgage protection insurance is coverage that protects your family from losing their home if you should pass away. It guarantees that the mortgage will be paid off in the event of your death. Mortgage disability insurance will cover your mortgage if you should become unable to work due to illness or injury. If you wish to have this coverage for your family, you will have to look for an insurance agent yourself; the bank will not require you to have this coverage.
You can have private mortgage insurance and mortgage protection and/or mortgage disability insurance all at the same time. You can also get mortgage protection and/or mortgage disability insurance coverage even if you are not required to have PMI coverage because they are separate policies.
It is important to understand the differences between these policies because they can help you plan for your family’s future. If your family would not be able to make the mortgage payments without the main income earner’s salary, private mortgage insurance will not be enough; you should consider mortgage protection and/or mortgage disability insurance to ensure that your family will not lose their home. Private mortgage insurance will only ensure that the lender does not lose money; it will not protect your family during financial hardships.