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Mortgage Payment Insurance - Is Mortgage Payment Insurance A Ripoff?

borrower lender payments private

Even before the subprime mortgage crisis, lenders were understandably wary of the lending process. There are many insurance products designed to protect both lenders and borrowers from the various pitfalls associated with the mortgage business. For example, one of the most common and most reviled types of insurance is private mortgage insurance or PMI. Many people are under the impression that PMI means that their dependents and/or heirs will receive money if they die before paying off their mortgage.

In reality, private mortgage insurance is all about protecting the lender from the borrower’s death. Private mortgage insurance reimburses the lender for the cost of the borrower’s lost payments as a result of death. The disadvantage is that the lender has the borrower pay for it. In essence, the borrower is insuring the lender against the risk of their default. This is a great deal for the lender, but often not so good for the borrower, especially since private mortgage insurance is usually quite pricey.

There are other types of insurance, however, including title insurance, homeowner’s insurance, etc. Another type of insurance gets a lot less attention, but it is used pretty frequently. It is called mortgage payment insurance, and it is designed to insure homeowners against the risk of not being able to make their mortgage payments. This kind of insurance is marketed to people in lower income brackets or in lower credit brackets.

Mortgage payment insurance provides coverage for up to six months’ worth of mortgage payments for a nominal daily fee. This nominal fee averages out to be around sixty dollars per month, or seven hundred and twenty dollars per year. Since up to six months of payments are covered, the policyholder is free to concentrate on paying down any remaining debt, selling their house or finding another job.

This kind of insurance may seem kind of redundant, especially when the borrower considers that many life insurance policies are designed to do the exact same thing. Why do borrowers need a special kind of insurance for a specific type of coverage already included with regular insurance? In addition to this factor, some restrictions may apply.

For instance, if the borrower has any kind of disability insurance, the benefit they receive from mortgage payment insurance may be reduced. Mortgage payment insurance may not even be needed, if the borrower has the right life insurance policy in place and is prepared to deal with the consequences of having to call upon that insurance. Mortgage payments must be made in order to keep the borrower’s credit rating positive, and as such a life insurance policy offering mortgage payment insurance is a much better deal than stand-alone mortgage payment insurance.

During a housing bubble, mortgage lenders are not the only ones to lose their heads and get involved in wantonly selling exotic mortgages. Insurance companies also started to offer many types of insurance designed to appeal to borrowers facing rising home prices. Now that the bubble has finally burst, perhaps we can start getting back to reality about mortgage payment insurance.

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