Don’t get confused between mortgage insurance and similar-sounding policies

by 25 Oct 2016

I am confused. Several of my customers have reported to me that companies are trying to sell them mortgage insurance policies after settlement, even those who have put 20% down. I thought only lenders ordered MI policies -- why are companies trying to sell them directly to the consumer?

--William from Alabama

This is a situation which is often confused. The policy which is being sold after settlement is a life insurance policy which is typically sold in the face amount of the mortgage. The concept is to protect one's family in the event of the death of the primary wage earner(s). Though it is tied to the amount of one's home loan, it is not really tied to the loan. For example, if one sold the property and paid off the loan, as long as the premiums continued to be paid, the amount of insurance would still be effective.

Mortgage insurance (MI) enables the lender to make a conventional loan with less than a 20% down payment based on the property value. Also called MI, private MI or PMI, mortgage insurance is an insurance policy that reduces the amount a lender (or subsequent owner of the home loan) loses in the event that borrowers do not repay their mortgage. Thus, even though the policies' names sound the same, these are two very different types of insurance which have two distinct purposes. In the future, MGIC will be helping us define more about the purpose and workings of conventional MI.

--Dave Hershman

Dave Hershman has been the leading author and a top speaker for the industry for decades with six books authored and hundreds of articles published. His website is www.originationpro.com. If you have a reaction to this commentary or another question you would like answered in this column? Email Dave directly at dave@hershmangroup.com.

Poll

Is TILA-RESPA a good or bad thing long term?