Mortgage Insurance Policy

What Does Mortgage Insurance Policy Mean?

A mortgage insurance policy is an insurance product that protects the lender if the borrower defaults on loan repayments, dies, or becomes unable to meet their loan obligations for any reason. This may refer to mortgage life insurance, mortgage title insurance, or private mortgage insurance (PMI). Homeowners who cannot make a down payment of at least 20% are often required to purchase PMI. A mortgage insurance policy is separate from the homeowners insurance that lenders also require, and since homeowners insurance covers the house itself rather than the loan balance, buyers comparing homeowners insurance companies should plan on carrying both when they close on a property.

Insuranceopedia Explains Mortgage Insurance Policy

Mortgage insurance premiums are typically paid monthly, although some lenders may collect the entire premium when the loan is issued to the borrower. The coverage may decrease over time, starting with the original loan amount and reducing as the loan is amortized, or it may remain level, based on the original loan amount. In the event of the borrower’s death, the lender receives full repayment of the loan from the insurance company, with any excess paid to the borrower’s beneficiary. Because that payout goes directly to the lender, some families instead buy a term life insurance policy and name a relative as the beneficiary, which lets the survivors choose whether to pay off the mortgage or use the money for other expenses. That flexibility is a common argument for skipping a dedicated mortgage life insurance policy in favor of a standard term policy.