Understanding Private Mortgage Insurance

Q: I do not have private mortgage insurance (PMI), nor does my lender require it for my house. But I’m thinking maybe I should buy this insurance to protect me.

I owe $150,000 on my home, which has been appraised at $225,000. I have a life insurance policy of $100,000 that I pay for so that my heirs will have enough cash to bridge the gap between when I die and when the house can be sold.

Now that PMI is deductible, I am thinking about my options: Should I buy PMI and dump my life insurance, don’t buy PMI and keep the insurance at $100,000 or perhaps increase my life insurance policy?

I plan on staying in this house until 2017 when I will be 66, if all goes well. Of course, I might move and buy a more expensive house by then. I guess what I’m asking is life insurance a better choice than PMI?

A: Don’t get rid of your life insurance policy just yet. I believe you may not fully understand what PMI is for and how it can help some people.

First, private mortgage insurance doesn’t protect you, the homeowner. It’s there for the sole benefit of the mortgage lender. If you default on your mortgage, the house will be sold and if there are any losses, PMI kicks in to reimburse the lender — not you.

It’s not surprising that you’re confused by this. It would be natural to think that because you’re paying the premiums, PMI protects you. It doesn’t.

Also, the new rules state that for PMI to be deductible, you must get a new loan in 2007, and your adjusted gross income must be below $100,000. Also, if you have more than 20 percent in equity, you wouldn’t get PMI. You’d have to take out a much larger loan.

In short, life insurance is a much better option. If you can afford more life insurance, and if you need it, you should buy term insurance and purchase it online from one of the big insurance websites.

Thanks for writing.


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