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Private Mortgage Insurance: What You May Not Know and How It Can Hurt
Your Family
WHAT IS IT?
Private Mortgage Insurance (PMI) is private
insurance that protects a LENDER in the event
that a homeowner defaults on a loan. Most lenders require a 20 percent
down payment. Private Mortgage Insurance allows those who are unable to
pay 20 percent to take out a mortgage by insuring the lender against the
risks of foreclosure. The lender pays private mortgage insurance, but
buyers who cannot pay 20 percent equity have to pay a higher interest
rate to cover the insurance. The FHA also offers a similar insurance
that provides the same lack of protection for the homeowner.
A significant portion of
all home owners are required to purchase PMI as a condition of being
accepted for a loan, however, most do not understand what type pf of
protection it offers, and most importantly, WHOM it protects. As a
result, many new homeowners pass up the opportunity to purchase life
insurance (mortgage protection) in the mistaken belief that they are
already covered. This can result in tragic circumstances when an income
provider dies or becomes disabled and the homeowner discovers, too late,
that the PMI they were required to pay for ONLY protects the lender,
DOES NOT pay off their mortgage or make the payments and; consequently,
they can lose their home to foreclosure.
Not only does PMI
not protect the homeowner, it is not even deductible as the
result of a long standing IRS regulation. Congress is currently
reviewing that status, however, differences in how such a deduction
would work and election year politics makes it unlikely that any relief
will be granted in the near future.
IS
THE HOMEOWNER REQUIRED TO CARRY PMI?
PMI is maintained at the option of the current
owner of the mortgage (lender). In many cases, the lender will allow
cancellation of mortgage insurance when the loan is paid down to 80% of
the original property value. However, the degree of equity in the home
is not the only factor that a lender may take into consideration. Note
that the law in certain states requires that mortgage insurance be
canceled under some circumstances.
CAN
THE HOMEOWNER RECEIVE A REFUND?
If all the mortgage insurance was financed at the
time of origination and is canceled prior to its maturity, the homeowner
may be entitled to a refund if the refundable option was chosen at time
of origination. However, if the no refund/limited option was chosen, no
refund is due.
WHY
THEY SHOULD CONSIDER BUYING LIFE INSURANCE FROM YOU
If a prospect wants to
protect their mortgage they must do so by purchasing life or disability
insurance policies that allow them to designate the beneficiary(s) of
their choice. In that they probably prefer not to think about life
insurance, they will normally be more receptive to your offer of
“Mortgage Protection” which, of course, is life or disability
insurance. Your prospect will be much quicker to invite you into their
home if you avoid using the words “Life Insurance”; however, you should
NEVER tell your client that “Mortgage Protection” is NOT life
insurance. It is both dishonest and unethical.
The only way your
prospects can be sure that their loved ones will not lose their home in
the event of a tragedy is to purchase an insurance policy from you or
someone else. If your prospect is confusing PMI with the life insurance
you are offering, it is to their benefit, and yours, to explain the
difference and remind them of the risk they would be taking if they
chose not to obtain coverage through you or someone else.
If your client is paying
for PMI or FHA insurance and does not have enough life insurance to
protect ALL of their needs, including their mortgage, you should
strongly urge, and they should seriously consider, the purchase of
enough insurance to properly protect them and their families. Failure
to do so could result in the loss of their home to foreclosure in the
aftermath of a family tragedy.
For more resources to
help you make the sale visit
www.lifeleads.net.
About The Author
Mr. Osman is the pen name of a nationally
recognized award winning life insurance Master General Agent and
consultant and has been developing life insurance leads and teaching
closing techniques for almost twenty five years. Contact him at
LifeLeads.net
(605-362-2576) or at
eric@lifeleads.net.
Copyright Eric Osman © 7/10/06
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