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A matter of policies

When you obtain a home loan, you almost always have to buy insurance. The lender wants to be protected in case your house burns down or it is in a flood zone. While policies that cover you against those types of disasters are easy to understand, two other policies _ private mortgage insurance and "credit life" insurance _ are a bit more complex.

If you don't understand how mortgage insurance and credit life policies work, you may be paying for coverage you don't need or mistakenly feel that you're protected against mishaps even though you really aren't.

"A lot of people confuse mortgage insurance with credit life insurance, but they're two totally different things," said Curt Culver of Mortgage Guaranty Insurance Corp., a big mortgage insurer based in Milwaukee.

Private mortgage insurance, or PMI, doesn't really protect you. Instead, it protects the lending institution that makes your home loan.

Generally, a lender will require that you buy PMI if the size of your downpayment is less than 20 percent of the purchase price of your home.

"Lenders don't like to make loans to borrowers who make small down payments because low down payment loans are a little more risky," explained Suzanne C. Hutchinson of the Mortgage Insurance Cos. of America, a trade group with headquarters in Washington, D.C.

"But if you buy mortgage insurance, the policy will reimburse the lender for part of its losses if you eventually go into default. Since the lender will have that added protection, you can get a loan with a down payment as small as 5 percent."

PMI payments are usually made into an impound account and factored into your monthly mortgage bill. The cost depends primarily on the size of your mortgage, but typically ranges from $25 to $50 a month.

While PMI protects the lender, "credit life" insurance protects you or your family.

Credit life, sometimes called "mortgage life" policies, are offered by many lenders, insurance companies and other big institutions.

"If you die, the credit life policy will pay off your mortgage and make life a lot easier for your heirs," said Gene Grabowski of the American Council of Life Insurance.

If you are thinking of buying a credit life policy, you will want to do lots of "comparison shopping" among insurers to get the best rates.

Also read the fine print on the policy before you sign. Some insurers, for example, will pay off only if you die accidentally; your heirs wouldn't get a nickel if you died of natural causes.

In fact, it might even be cheaper to shun credit life altogether and simply increase the amount of your standard life insurance policy if you are worried about how your loved ones will pay for their housing after you're gone.

If you are looking for private mortgage insurance because you're making a small down payment, your options to shop around will probably be limited. That's because most lenders deal only with one or two insurance companies, so you'll be stuck with the insurer that the lender designates.

Remember, however, that you probably won't have to carry PMI forever. Once you have obtained a 20 percent equity stake in your property _ either because prices have risen or you've paid the loan down _ many lenders will let you cancel your policy.

The cancellation process varies from lender to lender. Generally, you must first send a written request to the lender asking that the policy be canceled. Next, you must pay to have the home valued by an appraiser who is approved by the lending institution.

If the appraisal confirms that you have a minimum 20 percent equity stake, the lender can cancel your monthly insurance premium.

Should the lender balk at your request to cancel your PMI, ask if your home loan has been sold to the Federal National Mortgage Association (Fannie Mae) or the Federal Home Loan Mortgage Corp. (Freddie Mac).

These two quasi-government agencies, which purchase about 2-million loans a year from lending institutions across the country, require lenders to cancel PMI if certain conditions are met.