When you are in the process of purchasing a home and obtaining a home loan, be sure you understand what people are talking about when they discuss mortgage insurance.
There is frequently some confusion among borrowers about the types of insurance they are discussing when they are talking to their bank.
Lenders feel they have to protect themselves when a lender has a very little down payment. The idea is that the buyer does not have enough equity, or enough of his own money put into the property to make walking away from it a less attractive idea. With a small down payment, the dollars invested doesn’t give the homeowner much incentive to protect the investment.
In this case, the lender will require an insurance policy that the borrower is responsible for, but that protects the bank in case of default. The lender is the beneficiary of this type of mortgage insurance.
The other kind of policy concerns the borrower who is concerned that his family will not be able to keep the home if anything should happen to him.
The main wage earner would take out a policy that would protect his family and permit them to keep the residence, in case anything happens to him.
If you want to protect your family in the event of your death, you would subscribe to mortgage life insurance, which would pay down the outstanding balance on your home in the case of your death. Most mortgage life insurance policies are decreasing term, which means that the residual benefit of the policy decreases over time, as the mortgage decreases in outstanding value. There is no need to continue paying the premium on a $200,000 mortgage as the balance gets lower and lower with each mortgage payment.
In the instance of mortgage disability insurance, the amount of the monthly home loan payment will be guaranteed for the allowable period of the disability.
Take sure you are clear on the terminology that your bank uses when you are discussing mortgage insurance. While there are many banks who offer mortgage life and disability insurance, and they even earn money on it, if you have a low down payment loan, make sure you don’t think you are getting protection for your and your family when you are actually getting protection for your lender.
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