Can mortgage insurance replace PMI?

Question

I recently bought my first house, and admittedly have no idea what I'm doing when it comes to home financing. I did not put down 20% so I have to have PMI until I pay off the principal up to 20%. That makes sense to me. My PMI payment is roughly $250 per month and was secured by loan agent - I had nothing to do with getting that policy.

However, after I bought the house I started getting letters from various companies trying to sell me "mortgage insurance". I gave one of those companies a call and some guy came over to take my information. He claims that if I get mortgage insurance from his company, the payments would be about half of my PMI payments (he quoted me an exact dollar amt and that amt was on the application). Also, he said that the mortgage insurance would replace the PMI. He said that he would work with my lender to include them on the mortgage insurance policy so in the event of my demise the house would get paid off and the remainder would go to my estate. This would mean that my overall monthly escrow payment would actually go down by over $100.

I haven't committed to anything yet, but the application is going through. However, I'm a skeptic and a believer in "if it's too good to be true, it probably isn't". So this whole idea of saving money on PMI is a little hard to believe. I asked as many questions as I could think of to try to find the scam, but the guy had all the right answers.

Is this a legitimate concept? What is mortgage insurance and how does it compare to PMI? What questions should I be asking of this guy before I commit to a policy? Should I talk to my lender and if so how should I approach them about it?

Answer 1

PMI IS Mortgage insurance. It stands for "Private Mortgage Insurance". This guy is just trying to get you to buy it from him instead of whoever you have it with now.

Your lender would always be on the policy since it is an insurance policy they hold (and you pay for) that protects them from you defaulting on the loan. Don't think of it as insurance for you in case you can't pay. If that should happen, your credit would still be trashed, the bank just wouldn't be out the money. You don't really get any benefit at all from it. It is just the way a bank can mitigate the risk of giving out large loans. This is why people are keen to drop it as soon as possible.

The whole thing about keeping the house in your estate after you die makes me think he is trying to sell you a different type of insurance called Mortgage Life Insurance. PMI isn't typically about that type of situation. Your estate will go into probate to work out your debts if you die and my understanding is that PMI doesn't usually pay out in that situation.

If this is what he is selling, buying such a policy would be on top of your PMI insurance payment, not instead of it. Be forewarned, personal finance experts usually consider mortgage life insurance to be a ripoff. If you want to protect against the risk of your heirs losing the house because they can't make the payments, you are better off with Term Life Insurance.

However, don't worry that they will inherit your debt on the house unless they are on the loan. If they don't want the house, they won't be obliged to make payments on it (unless they want to keep it). It won't affect their credit if they just walk away and let the bank have the house after you die unless they are on the note.

Here is an article (in two parts) with a pretty good treatment of the issue of choosing your own PMI policy: "Give Buyers Freedom to Choose Mortgage Insurance"
Part 1
Part 2

Answer 2

I'd ask this guy for more information.

"Mortgage insurance" is just another name for "PMI". He could be trying to sell you an alternative PMI policy. If the bank will accept this as a replacement for your current PMI and the rates are lower, sounds like a good deal.

He might also mean "mortgage life insurance". Mortgage life protects your heirs if you die. If you're the primary income source for the family -- especially if you have a wife who is a stay-at-home mom taking care of the kids, and you don't want to force her to have to give that up and get a job if you die -- mortgage life can be useful. But any mortgage life policy I've ever seen only kicks in if you die. The bank wants PMI to cover the possibility that you'll fail to pay for any reason: maybe death, but also losing your job, being a dishonest jerk, etc. Maybe there's an insurance company out there now that offers a mortgage life policy that also protects the bank if you default. I'm not an expert on all things insurance so I can't say it doesn't exist.

But I'd make sure this salesman isn't telling you a tall tale, that once you buy this policy the bank will cancel your PMI when really they will do no such thing. I'd talk to the bank before signing anything.