Primary aim of mortgage insurance is to protect the lenders in the event of home loan default. Borrowers purchase this insurance and pay the premiums; in turn, insurance companies promise to make the remaining mortgage payment in case of loan default. In other words, the lender becomes the beneficiary of mortgage insurance policies.
Types of Mortgage Insurance
All the mortgage insurance policies can be broadly categorized into 2 types, namely, (1) Private Mortgage Insurance and (2) Mortgage Protection Insurance.
Private Mortgage Insurance (PMI)
If you’re not able to afford 20% down payment on your mortgage loan, then you may require purchasing a Private Mortgage Insurance or PMI. This insurance policy protects your lender against loss if you default on your loan repayment.
There are 2 types of PMI, which are described below.
(i) Borrower-paid PMI: It is a type of PMI wherein the borrower pays the insurance premium. Usually, you’ll have to purchase it if you’re unable to make the required down payment on your home loan. It is also referred to as ‘Traditional Mortgage Insurance’ or BPMI (Borrower-Paid Private Mortgage Insurance).
(ii) Lender-paid PMI: When lender pays for PMI, then it is referred to as LPMI (Lender-Paid Private Mortgage Insurance). However, lender recovers the premium cost by adding it to the mortgage loan interest. Usually, this insurance is purchased by a lender in case of high loan-to-value mortgage.
Mortgage Protection Insurance
Mortgage protection insurance covers your home loan payments when you’re unable to make your monthly mortgage installments. Owing to its coverage, this insurance is sometimes referred to as mortgage payment protection insurance. Mortgage protection insurance can be divided into 3 types, which are discussed below.
(i) Mortgage Life Insurance: The benefits of mortgage life insurance are somewhat similar to any other life insurance policies. This mortgage insurance is meant to pay off your remaining mortgage loan in the event of your death. If you purchase this insurance, then it’ll save your family members from losing their home.
(ii) Mortgage Disability Insurance: Mortgage disability insurance promises to make your monthly home loan payments in the event of your physical disability. However, you can avoid purchasing this insurance if you have other types of disability insurance policies. The amount of coverage is usually dependent upon your salary at the time you become disabled; usually, the coverage amount varies between 50-70 % of your salary.
(iii) Mortgage Unemployment Insurance: It is quite obvious that you’ll face difficulty in making your monthly mortgage payments in the event of your sudden job loss. You can have mortgage unemployment insurance that can cover your monthly home loan payments if you suddenly become unemployed.
Some insurance companies may offer combined mortgage protection insurance, wherein you get the benefits of both mortgage unemployment insurance and mortgage disability insurance. Sometimes, mortgage disability insurance is offered as a rider with mortgage life insurance. Therefore, it is advisable that you clearly understand the types of coverage before purchasing your mortgage insurance.
The 8 Benefits of Mortgage Insurance
1. Home ownership on your terms. With the right preparation and resources, you can buy a home that best suits your lifestyle. Mortgage insurance provides you with innovative options to help get you into home ownership.
2. Be eligible for a better interest rate. Mortgage insurance provides a lender with the flexibility to offer you the same competitive mortgage interest rates available to home buyers with a larger down payment.
3. More down payment options. Don’t let the down payment be the barrier to your home ownership dreams. There are many mortgage insurance products that will help you to achieve home ownership.
4. Buy, instead of renting. If you’re paying rent right now, it can be a good move to consider buying a home that has similar monthly carrying costs. You’ll enjoy the freedom of making your living space into your own home with your personal touch.
5. Overcome traditional barriers to financing. More and more homebuyers who may not have qualified for a mortgage are benefiting from mortgage insurance.
6. Own and enjoy a vacation property. If your financial situation is in good standing and you are thinking about buying a vacation property, there are mortgage insurance options that will allow you to do so.
7. Save on household purchases. When buying your first home, you’ll find expenses can add up quickly.
8. Get help when you need it. Whether from a job loss, a serious illness, or a marriage breakup, financial difficulties can arise when you least expect them.
Mortgage Insurance Tax Deduction
The Mortgage Forgiveness Debt Relief Act of 2007 also extended a tax deduction for private mortgage insurance (PMI) that was set to expire in 2007. The extension allows eligible homeowners to deduct the cost of their mortgage insurance premiums through 2013.
Who qualifies for the deduction? Home-owning families with an adjusted gross income of $100,000 or less qualify for the deduction. Families with incomes up to $109,000 are eligible for a partial deduction.
Second-Home Tax-Break Loophole Closed
Under current law, homeowners can exclude from taxation a certain amount of the gains from a home sale, provided the property was the primary residence for two out of the previous five years. The maximum exclusion is $250,000 for a single person and $500,000 for a married couple filing jointly.
Vacation and rental property owners figured out that they could legally double dip the exclusion by first selling their primary residence and avoiding tax on the capital gain. Then, after moving into the second home for two years to qualify it as their primary residence, they could sell the home and avoid paying taxes on the full amount of the capital gains earned on the second home.
This legal means to double dip ended on January 1, 2009, however. After that date, if you live in a home that you’ve also used as a vacation or rental home, you do not get tax relief on the capital gains earned while you did not live in the home. You can, however, get tax relief on the capital gains earned while you are using that home as your primary residence.