Making down payment is one of the biggest challenges people face while buying a new home. Most of them aren’t able to buy their dream home just because they haven’t enough cash or savings with them. Mortgage payment protection provides a convenient way to buy their home with low or no down payment. In return, the homeowners need to pay a monthly installment to the insurance provider. Private mortgage insurance (PMI) is the most common insurance to be bought by the new homeowners. In this article we are going to talk about different types of private mortgage insurance, their benefits and how are the insurance premiums are decided. Also, you will learn which insurance plan is the most suitable for you and how can you get your mortgage insurance at the best price.
Types of Private Mortgage Insurance
Mortgage protection insurance policies enable the homeowners to keep their mortgage protection plan active in case you go off work due to sickness or meeting an accident or even losing their job. Such insurance plans protect your home to go into foreclosure in case you aren’t able to make your mortgage payments due to your inability to work. In those days, your insurance provider will make the scheduled mortgage payments to the lender and will ensure that you don’t lose your home in odd situations. Even if you die while the policy is in effect, the insurer will pay the outstanding mortgage and your family and happily live in their home.
Private Mortgage Insurance or PMI offers a range of insurance options to the buyers with specific requirements. Those insurance plans are named below:
- Borrower-paid monthly PMI
- Lender-paid monthly PMI
- Single PMI
- Split PMI
Borrower-paid monthly PMI (BPMI)
Borrower-paid monthly PMI or BPMI is one of the most common mortgage protection plan people go with. Under this policy, the insured or buyer needs to make a monthly mortgage payment to the insurer and in return, they will take care of the mortgage payments in case the buyer goes off work. These plans are a good option for the buyers who want to keep the mortgage payment low and aren’t sure how long they will stay in their home. These plans come with both refundable and non-refundable options. Under the refundable one, a partial amount is provided to the buyer depending on how long the policy had been in effect. With a non-refundable BPMI, you generally don’t receive any amount on canceling the policy. However, if the policy cancellation falls under the Homeowners Protection Act 1998, there are chances you may receive a partial refund.
Lender-paid monthly PMI (LPMI)
Under a Lender-paid monthly PMI or LPMI plan, the lender makes the mortgage payments in case you go off work and aren’t able to do the same. However, it’s not done for free and the lender will increase the mortgage rates for giving this favor. Through a higher interest rate, the lender can recover a bigger portion of the total mortgage amount within a shorter time-frame. Initially, these plans have a lower monthly payment and increase once the buyer fails to make the payments. Lender paid monthly mortgage insurance has one more advantage over other PMI plans. Using a lender-paid policy, you may qualify for a tax deduction on your mortgage interest payments. However, these policies don’t come with a cancellation option and you aren’t likely to receive any refund if you cancel the plan.
Single Premium PMI
Mostly, people go with the typical mortgage protection plan requiring a monthly payment and don’t search much for other options. This is whythese plans aren’t that known to many insurance buyers. Single premium policies provide the buyersa unique option to make an upfront payment and they won’t have to pay the mortgage every month. Making an upfront payment at the time of buying, enables to pay a comparatively smaller amount of mortgage to be paid monthly, quarterly or half-yearly. Also, when the monthly mortgage payment is low, you can qualify for a larger loan amount providing more coverage to you and your home. However, these policies are non-refundable and you may receive anything in case you cancel the policy in between.
Split Premium PMI
Split Premium PMI is the least known private mortgage insurance policy among the mortgage borrowers. But, that doesn’t make it less important in any context. These policies allow the borrowers to pay a portion of the mortgage through a lump sum amount and pay the rest in monthly premiums. For example, if you purchase a home for $200,000 and make an upfront payment of 1% that is $2000 to the insurance provider, your monthly mortgage payments will fall from around $120 to around $80. These plans are a good option when you have some extra cash to make an upfront payment and qualify for a bigger coverage.
How are the PMI premiums decided?
Private mortgage insurance or PMI premiums mainly depend on the lender but there are a few factors the help the insurer determine premiums for a particular mortgage loan.
- Loan amount
- Loan period
- Loan-to-value ratio
- Type of loan
- Credit score
For a certain period, the mortgage with a higher loan amount will have a comparatively expensive premium. Similarly, if a loan of $200,000 for 20 years will have a cheaper premium than a policy for 15 years. The loan-to-value ratio represents the ratio of the mortgage loan and the value of the asset purchased. Higher this percentage will be, you will have to pay a lesser premium. Also, the type of the loan you choose matters a lot. A borrower-paid monthly mortgage insurance will have a comparatively expensive premium that a split premium PMI. Next big thing is the credit score of the insurance buyer. Your credit score determines your reliability and hence your mortgage insurance premium. If you have a credit score more than 625, there are chances that you may qualify for a cheaper mortgage premium.
What type of insurance should you choose?
Insurance companies offer a wide range of mortgage insurance plans to their customers but it’s the customer who has to decide which insurance plan they want for their home. While buying a mortgage protection plan, you need to consider a number of things including your savings as well as the duration you want to a mortgage. If you have a decent amount of savings, you may choose the single payments PMI to make an upfront payment avoid the monthly payments for the same. But, if you haven’t saved enough to make an upfront payment, the BPMI is made for you. Also, there is the option of LPMI, but it benefits the lender more than the buyer as the premiums increase once the buyer misses his mortgage payment.
How to get the insurance at best price?
Once you have deiced that a certain type of insurance is perfect as per your requirements, the next thing is to get it at the most affordable rates. You can visit the websites of reputed insurance providers in your locality and request a quote for the same. Within a short period of time, you will start receiving a number of online mortgage life insurance quotes for your preferred insurance type. The experts from different insurance providers will reach you to offer the best insurance plan for you. You can let them know your insurance requirements, the desired coverage as well as your budget constraints. They will listen to your exact insurance requirements and offer the best mortgage life insurance quotes for you. Comparing those top quotes, you can choose the most affordable insurance plan providing the maximum coverage.