Dear Dr. Don,
Do I need private mortgage insurance, or PMI, and mortgage protection insurance, or MPI? Is there a chance that just one of the two can meet my needs here?
— Janice Juxtaposition
Let’s get our letters straight and discuss the differences between PMI and MPI. The same letters are involved, but the products have different meanings and uses. The fact is, you might not need either, or you might find that both are useful for your particular situation.
PMI protects the lender, not you, against the risk that you will default on your mortgage. Conventional financing requires PMI when the loan-to-value ratio, or LTV, is over 80 percent of the appraised value. Understandably, many homeowners don’t like the added expense of PMI. But it can help people buy a home when they don’t have the funds for a 20 percent down payment. Not everyone who obtains a new mortgage is required to get PMI.
On the MPI question, mortgage protection insurance is more of an optional product. It makes loan payments when an unusual insured event might prevent normal payments from being made. A policy is typically intended to pay off the mortgage if the insured dies. It might also be used to protect against disability or unemployment, either of which could cause hardship and financial distress.
Disability and job-loss provisions cover the home loan’s principal and interest payments for a set or defined period. In some cases, there can be a waiting period before the disability coverage kicks in. A policy might also be written to include payments for homeowners association fees.
The life insurance component, like the mortgage balance, declines over time. This type of insurance often works best for people who can’t obtain or afford conventional life or disability insurance because of health or occupation.
There’s no set answer regarding your own insurance needs. If you think that there are special risk factors or circumstances in your case, consider contacting an insurance agent.
The potential value of insurance should always be viewed within the context of all your financial needs and goals.
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