If you’re anything like most borrowers, you seldom pay attention to the details of the financial documents you sign. Whether you’re sitting in front of a desk listening to a mortgage title specialist or completing an online credit card application, what you don’t know may cost you money. After all, who has the time or patience to check the small print? Throw in a few fast talking sales representatives, and all of a sudden your budget is seriously out of whack!
While Private Mortgage Insurance (PMI) is often a necessary part of buying a home, Payment Protection Insurance (PPI) is never necessary. It’s important consumers understand the difference to protect their finances.
Private Mortgage Insurance
Whether you’re thinking about buying a home or you already have a mortgage, it’s important to understand the ins and outs of private mortgage insurance (PMI). According to Money Crashers, a personal finance blog, PMI can add anywhere from $50 to $200 to your monthly mortgage payment, depending upon the applicable PMI rate and the remaining balance on your mortgage. Nevertheless, you may be able to avoid paying for private mortgage insurance altogether.
Your lender may require you to pay a monthly premium if the loan to value (LTV) ratio of your mortgage exceeds a designated threshold, usually 80 percent. For example, a $30,000 down payment on a $300,000 loan would result in a loan to value ratio of 90 percent. In the event that you default on your loan, the 20 percent margin provides protection for the lender if they foreclose on the property and it sells for less than the original sales price. PMI does not protect you. It protects he lender.
Ask your lender whether there are any programs available to avoid PMI. Once you understand whether PMI insurance is absolutely required and exactly how much PMI will add to your mortgage payment, you may decide to wait until you can afford a larger down payment. If you already have a mortgage, you can ask that the PMI policy be eliminated once your loan balance falls below the designated loan to value ratio. Even if you have to pay for an appraisal, the reduction in your mortgage payment should make up the difference in short order. Refinancing your mortgage may be another option to drop PMI premiums, but the cost of processing a new mortgage must be weighed against the potential savings.
Payment Protection Insurance
Payment Protection Insurance (PPI) is an insurance product that makes minimum payments on loans if you are unable to make payments due to loss of income. PPI policies usually apply to revolving credit accounts and pay benefits directly to the lender. Unfortunately, PPI has been improperly sold to millions of customers as “loan repayment insurance.” This controversial insurance product is most often sold by credit card companies, but it can also offered by banks and other lending agencies.
Consumers may be told that payment protection insurance is required. Consumers, already familiar with the necessity of PMI insurance, tend to accept PPI as a similar necessity. Sales representatives often benefit from large commissions for selling unnecessary PPI policies.
In most cases, the insurance seller is the only person who benefits from PPI. Unexpected exclusions often mean the policy doesn’t pay with the policyholder expects it to. If you choose to pay for PPI coverage, be very careful to understand exactly what types of events will trigger coverage. Common life events such as a back injury that keeps you out of work may not be covered by the policy. Any policy that provides real protection will cover you for any event that is outside of your control and prevents you from paying your bills.