Borrower's mortgage insurance?

[Chowder]

I've got a relative who is a broken record about life and mortgage insurance.

I did not reaffirm but it got me to wondering if I did or were to re-sign or refi. post discharge, what would this policy actually do.

He's under the impression if you can't make the payments, the insurer does. Similar to a Life policy.

Thoughts?

[SunshineGal]

There are two main types of mortgage insurance. The first is called "Private Mortgage Insurance" and will show on your coupon as PMI. This does nothing for you other than allow you to get a conventional mortgage with less than 20% down. If reduces the lenders exposure, generally to 65% of the loan to value. The FHA loans are very similar, but it's just called mortgage insurance and shows as MI on the payment coupon.

The second type would be similar to a life insurance policy and possibly disability depending on the contract. If you die it pays off the mortgage.

For a while, one of the PMI companies did offer a type of insurance where if you lost your job it would pay a portion of the mortgage payment up to $1500, depending on the percentage of income for that borrower. For example, if the primary borrower made 75% of the total income, the insurance would pick up 75% of the payment.

Hope this helps.

[StartingOver08]

To add a little to SunshineGal's post, neither PMI (conventional) nor MI (FHA) will benefit the borrower in any way. The borrower or the bank can pay the premiums, depending upon how the policy is set up in the beginning. Most of the time the borrower pays, but if the LTV is less than 80% many of the banks put on lender paid PMI to decrease their risk in the loan. If the borrower defaults, there is a process the bank must complete to collect on the mortgage insurance.

Even if the mortgage insurance pays out, it will not reduce the deficiency that the borrower would pay. The mortgage insurance co would then go after the borrower for the deficiency. They usually hire CA's to do this though. When we are negotiating short sales, one of the parties frequently in the negotiations is the mortgage insurance company. BTW, AIG was the underwriter for many of these PMI deals!

[Chowder]

Thanks guys. Pretty much what my research was showing as well.

I thought maybe, just maybe, this relative knew what he was talking about. Guess not.

The only other thing I found, which he may be confusing with what he is calling "mortgage insurance", is just "Credit Insurance". This clearly looks to be a bad idea.

In the end I guess plain old Life Insurance would be the better way to go.
I just have a real hard time trusting any of these companies will be around in 20 or 30 years.

[StartingOver08]

.....

In the end I guess plain old Life Insurance would be the better way to go.
I just have a real hard time trusting any of these companies will be around in 20 or 30 years.

Yes. Term life is the way to go. Don't buy it from the lender either - buy it on a competitive basis through a regular insurance agent you know and trust.