February 28, 1997

MORTGAGE INSURANCE: LOOK BEFORE YOU BUY IT

BY TOM KELLY
The Real Estate Advisor

Did you take out mortgage insurance with that big, fat loan you just locked-in? Are you confused by the Congressional proposals that would require lenders to disclose when mortgage insurance is no longer needed?

The term mortgage insurance can mean different things to different people: mortgage life, personal (private) mortgage, mortgage unemployment. This can be complex territory, so let's explain the specific kinds:

n Mortgage life insurance: Mortgage life is commonly offered each time you take out a loan. If you purchase mortgage life insurance for the full value of your home loan, your home will be paid off if you die. It is typically offered at closing and then again after you have signed. Its big selling point is that it permits the surviving spouse to stay in the home without using other assets to pay off the mortgage.

Often, the goals of mortgage life can be accomplished by purchasing a term life insurance plan. This option can be less expensive and stays with the individual, not the loan.

Many people think the coverage follows the borrower, but it only follows the loan. If people refinance, they must again state that they want mortgage life. Some companies have experienced terrible situations where there was no insurance at the time of an unexpected bereavement. The policy holders had refinanced and not again applied for coverage.

Mortgage life premiums vary depending on age, loan amount and smoker status. A 35-year-old nonsmoker with a $75,000 loan can expect to pay $28 a month for mortgage life.

There has been no real increase in mortgage-life requests, insurance companies report, even though many homeowners have taken out new, big-numberloans. In fact, some people let the coverage extinguish when they refinance, despite the fact their new loan might be larger than their old loan.

Mortgage life is still available if you did not accept coverage at the time you took out your loan or refinanced it. Ask the lender who wrote your loan, or the insurance agent who handles your homeowners insurance, for details.

n Personal (private) mortgage insurance: Because lenders consider borrowers who lack substantial down payments a greater risk than other home buyers, buyers with less than a 20 percent down payment must buy private insurance to guarantee their loan payments.

If the borrower defaults on the loan and the house is sold for less than the bank is owed, PMI will cover the difference.

PMI is required by lenders; mortgage life is an option. PMI costs differ according to coverage. All borrowers who take out loans guaranteed through the Federal Housing Administration must pay PMI -- it's simply part of the package.

Unlike conventional-loan borrowers, FHA borrowers are stuck with PMI payments until the loan is paid off -- unless it's a special program so check with your lender. Some lenders require borrowers to pay 20 percent of their mortgage loan before removing PMI payments. The lender also may require two years of flawless payment history. If the loan is sold, the investor makes the final decision on waiving PMI payments.

n Mortgage unemployment insurance: This coverage is the new kid on the market and will pay an individual's monthly mortgage payment, including principal, interest, taxes and any escrow impounds, should the insured become involuntarily unemployed. Payments are made directly to the lender or lien holder, not to the individual policyholder.

Premium costs average about 3.5 percent of the monthly mortgage payment. But the cost varies depending on the occupation. Morgard (1-800-647-1436) is the only known company offering coverage in this state and works through lenders, not individual borrowers. There are 1,200 insurable positions (some with costly premiums). Variables include the type of job, geographic location and monthly mortgage payment amount.

For example, if your monthly mortgage payments are $1,000, your mortgage unemployment insurance would cost about $35 a month. The policies can be extremely pricey and may not make sense for some borrowers.

Mortgage insurance has many meanings. Don't be confused at closing. Check your options before proceeding. (Next week, lenders respond to new proposals for disclosure).

Previous columns:

• COMPETITION BETWEEN LENDERS MEANS SAVINGS FOR HOME BUYERS, 02-21-1997
• MONTANA TOWN GOES TO GREAT LENGTHS TO ATTRACT RESIDENTS, 02-14-1997
• SOME LENDERS OFFERING FREE AIR MILES, 02-07-1997
• SOME TIPS ON CARRYING CONTRACTS, 01-31-1997
• EQUITY SHARING CAN WORK FOR SOME DEALS, 01-24-1997
• HAVING TROUBLE MAKING THE DOWN PAYMENT?, 01-10-1997
• HOME PRICES WILL SURGE IN 1997, 12-27-1996
• BUYING A COMPUTER THROUGH A HOME LOAN, 12-13-1996