Mortgage Insurance (PMI) vs. Mortgage Life Insurance.
If you own your own home or own an investment property likely you've received offers in the mail for some form of mortgage life insurance. This insurance is designed to pay off your mortgage in the event of your death (and sometimes disability) and is really just a specific form of life insurance.
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Many people get the term "mortgage life insurance" confused with another form of insurance with a very similar name called mortgage insurance (also called private mortgage insurance or lender's mortgage insurance). This insurance is completely unrelated to life insurance and is designed to protect your lender. If the total loan to value (LTV) of your loan against your property is more than 80% it is likely your lender will require this insurance.
As an example let's say you purchase a home for $200,000 and put down 10% ($20,000). Since you are financing 90% your lender may require mortgage insurance (often referred to as MI or PMI) to cover the extra risk they incur should they have to foreclose on the property and fail to recover their funds as part of the foreclosure process. This insurance might cost anywhere from 0.2% to 0.91% of the value of the loan. In the above example a 0.91% PMI policy would cost $1638 per year (0.91% times the $180,000 financed). If this is added to your monthly payment it would work out to be $136.50 per month ($1638 / 12).
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Again, mortgage life insurance pays off your mortgage in the case of your death (or disability in some cases) and is for the protection of your heirs. Mortgage Insurance "MI" (also called Private Mortgage Insurance "PMI") pays off the bank if you default on the loan and the lender can't collect all monies owed as part of the foreclosure.
Two quick additional points - Not all loans over 80% of property value require this insurance. If you do two loans, one at 80% LTV and one at 10% instead of one loan at 90% then it is likely you can avoid paying PMI. This is not always the case however and you should speak to your loan officer about this if you are financing more than 80% of your purchase (or refinance). Secondly, contrary to popular belief PMI on rental properties IS TAX DEDUCTIBLE. For more on this please see this tutorial on PMI tax deductibility. -back to tutorial index-
