It is possible that you already have enough insurance to cover your family's other needs, and all that is required is enough additional coverage to take care of the mortgage. In that event, take out a term policy large enough to cover the mortgage. It is better than a mortgage insurance policy.

Terms policies pay cash, which leaves your family with maximum flexibility. Mortgage life insurance pays off your mortgage, whether your family wants to use the cash that way or not. Furthermore, the coverage of a term policy remains constant during the term, whereas the coverage of a mortgage insurance policy declines as the loan balance is paid down, and disappears completely if you refinance.

In addition, the market for term policies is extremely competitive, and you can shop among carriers. When you buy a mortgage life policy through your lender, in contrast, you have no opportunity to shop. The upshot is that the mortgage insurance policy will probably cost more than the term policy. You will be paying more for less coverage.

WHY CAN'T I GET A SECOND MORTGAGE?

"In August of 2002, we refinanced into a negative amortization adjustable-rate mortgage. Since we have plenty of equity in the house and because we need to do some major home improvements, we've been trying to secure a home equity loan. But as soon as lenders hear that that we have a negative amortization ARM, they lose interest in making a home equity loan. Why is this?"

A home equity loan is a second mortgage, meaning that in the event of a default the second mortgage lender gets paid only after the first mortgage lender is paid. If there is nothing left after the first mortgage lender is repaid in full (including delinquent interest and foreclosure expenses), the second mortgage lender gets nothing.

Second mortgage lenders assess the risk on a second by the amount of equity available to pay them. The equity equals the property value less the balance on the first mortgage. Since the loan balance on the great majority of first mortgages goes down every month, the equity available for the second rises every month.

But a negative amortization ARM is a different story. On these loans, the balance can rise over time, which reduces the equity available for the second mortgage. This is why your application was rejected out of hand.

I am a little surprised by this knee-jerk reaction. Had you gone to them with a fixed-rate mortgage equal to 75 percent of current value, they would have given you a second without a murmur. If they had invested the two minutes it took me, they could have learned that the balance on your negative amortization ARM now is only 60 percent of current value, and the balance cannot rise by more than 25 percent, which would bring it to 75 percent of current value in a worst case. Yet they heard the dreaded words "negative amortization" and shut their ears. Go figure.