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Archive for the ‘Mortgage Insurance’ Category

‘Mortgage insurance’ is a term that you will surely come across if you are going for a mortgage loan. Let’s get straight into finding out what this term (‘Mortgage insurance’) means.

Mortgage insurance is a great tool for both the borrower and the mortgage lender. By definition, mortgage insurance provides protection to the mortgage lender in case the borrower defaults on the mortgage. Mortgage insurance covers the loss that a mortgage lender can incur in such a circumstance. So besides taking title to property, the mortgage lender is also protected against loss by mortgage insurance. The premium of this mortgage insurance is obviously paid by the borrower and there are different ways in which the borrower can pay this mortgage insurance premium e.g. one way is to include it as part of the monthly mortgage payments that are made to the mortgage lender (who in turn passes on the amount to the mortgage insurer).

However, how does mortgage insurance provide benefit to the borrower?

Since mortgage is a big financial transaction, the mortgage lenders need to safeguard their interests in all possible way. So, mortgage lenders require the borrower to demonstrate their commitment to the investment. One way of showing this commitment (and the ability to pay monthly mortgage payments) is to make a down payment. The mortgage lenders generally ask for a down payment of around 20%. However, if the borrower goes for mortgage insurance, the down payment amount may be significantly reduced by the mortgage lender. So, a borrower might be required to pay only 5% or 10% as mortgage down payment instead of the mandated 20% or whatever. This means that mortgage insurance is especially good for people who don’t have enough cash to make large down payments (as such 20% is quite a big amount in itself). Such people can save on cash by going for mortgage insurance. Moreover, since mortgage insurance provides a lot of confidence to the mortgage lenders (in terms of their investment being safe), the processing of your mortgage application could be faster and smoother than what it would have been without mortgage insurance commitment. So not only does mortgage insurance increase the buying power of a borrower it also provides him/her with benefits in terms of getting a good mortgage deal and getting it faster.

So, mortgage insurance is really advantageous both for the borrower and mortgage lender and the onus lies on the borrower to hunt for a good deal on mortgage insurance and also on the mortgage itself.

What Is Mortgage Life Insurance?

If you have a mortgage and are a home owner, you have most likely heard the pitch for mortgage life insurance. It typically comes in an envelope from your lender and might include a letter from your lender suggesting that you buy a policy.

It is important to realize though, that the insurance itself is sold by insurance companies. Even though it is called “mortgage insurance,” it is in reality decreasing term life insurance that will pay off your mortgage if you pass away.

How Are Premium Payments Planned?

Mortgage life insurance is a decreasing term policy. The policy starts with a death benefit that is equivalent to your existing mortgage balance. The death benefit reduces at the same pace as your mortgage balance. The premium payments never vary but may cease before the loan payment. Your lender may agree to include the premium payments to your monthly mortgage expense.

Is Mortgage Life Insurance Identical to Private Mortgage Insurance (PMI)?

No-mortgage life insurance is commonly befuddled with Private Mortgage Insurance (PMI), but they have little to do with one another. You purchase mortgage life insurance willingly to shelter your family from having to pay the mortgage.

Mortgage lenders require you to buy PMI to shield them (the lenders) from the probability that you will default on the mortgage.

Insurance Tip: Request for insurance agents to estimate their best price for a decreasing term policy in the same amount, period, and interest rate before buying from a sales pitch sent by your mortgage company.

What Is Credit Life Insurance And Credit Disability Insurance?

When financing some kinds of big items – automobile, furniture, audio equipment – there is a good possibility you will be presented with credit life and credit disability insurance. Credit life guarantees to pay your balance if you die. Credit disability will pay your payments if you become disabled and not capable of working.

Credit life is a decreasing term policy. The insurance premiums are typically added into the loan contract. This type of insurance is constantly voluntary and it can be rather costly. Your lender cannot require you to purchase credit life or credit disability insurance.

Although they may have some comparable elements, credit life and credit disability insurance are not the same thing as mortgage life insurance.
What Is A Life Insurance Rider?

A “rider” is something that is supplementary to the basic policy. Riders can be used to either add benefits to the policy or limit benefits previously in the policy. Common riders are as follows:

Accidental death: Double indemnity is an additional name for this rider. It means that the benefits paid by your policy will be two times the face sum of the policy if you die in an calamity.

Approximately twenty percent of policyholders perish in accidents.

The price for an accidental death rider is usually reasonably priced.

Some critics bring up the point that how the policyholder dies has nothing to do with how much money your survivors will need.

Waiver of premium: This rider allows you to cease paying premiums whenever you happen to become disabled and unable to continue working.

It is crucial to comprehend how the rider defines “disabled.” For example, the meaning could be very restrictive and require you to be so extremely disabled that you cannot do any sort of work whatsoever.

A disability policy can also defend you from monetary hardship due to a disability. Depending on the kind of policy you acquire, it could supply capital to pay for all of your living expenditures, not solely your life insurance premium.

Mortgage protection: This rider fundamentally attaches a mortgage life policy to your chief policy.

Other insured: You can insert life benefits for your spouse or children. They may have varying coverage amounts and be subject to medical underwriting, however.

Guaranteed insurability: This rider would characteristically be added to a whole life or universal life insurance policy.

It gives you the right to procure a new policy or amplify the maximum on your existing policy without having to pass another medical assessment.

The rider will most likely indicate how much you can add and at what time you can do it.

The guarantee may not persist after you reach your mid to late forties.

Accelerated death benefit: This permits you use some portion of your death benefit when you have an incurable sickness. Some policies will insert this rider without causing your premium to enlarge.

Insurance Tip: If your agent automatically includes riders when calculating your premium, request the agent to value each rider independently. You can then choose whether you think the additional benefit any rider provides is worth the added rate.

Mortgage insurance is needed usually when a person cannot come up with at least 20 percent of the sale price of the home as a down payment. This is a huge amount of money, more than many people have on hand so most of us end up with this mortgage insurance. You should not have to pay this insurance forever though. Once you get 20 percent equity in your home through your monthly payments then there is no longer a need to you to have this insurance. The only exception to this is with an FHA loan, if you have one of these types of mortgage then you will have to always pay this mortgage insurance.

It is the responsibility of the lender to let you know exactly when you can stop paying mortgage insurance. It is not hard to do the math in order to work out when you will come up on 20 percent equity and this is part of their job. It is actually their job to cancel the mortgage insurance for the borrower but you should still make sure that this is done when it is supposed to be. You also have the right to have your mortgage lender send you information about who it is you should contact if and when you have any problems concerning your mortgage. This info should come with your yearly statement.

In cases where a high risk borrower is being lent money then the lender can have this person make mortgage insurance payments until the balance gets as low as 50 percent of the value of the home. This group of borrowers is for those who have a habit of defaulting on mortgage payment. As long as you always pay your payments on time each month and each year you should not have a problem getting your mortgage canceled much sooner than this.

As long as you have at least 20 percent equity in your home getting your insurance canceled should be a cinch. If your lender is not willing to work with you on this point then refinance and work with a more flexible lender. Chances are that the new lender won’t require you to have this insurance at all. Watch out for high refinancing fees though as you do not want all of the money that you would save getting eaten up by fees.

If you want to stop paying your mortgage insurance but the lender is leery of doing this then consider getting a new appraisal. This might convince the lender that you actually have more equity in the home that they thought. These appraisals are not free though, they will cost you a few hundred dollars.

Prepaying on your loan can make a big difference in your monthly payments and in the amount of equity that you have in your home as well. Even just a few dollars a month can make a huge difference. And remodeling can boost the worth of your home enormously. Once you have upped the value of your home the lender can reassess your loan to value ratio.

There are different kinds of mortgage insurance. Private Mortgage Insurance (PMI) is insurance that protects the lender – the mortgage company. Many home buyers cannot afford to make the traditional 20% down payment on a home. They can make SOME down payment, but they don’t have and can’t get the money necessary to make a 20% down payment. With less than a 20% down payment, the lender is taking a larger risk. PMI is their guarantee that they won’t lose money. The buyer pays the monthly premiums for PMI.

The Federal Housing Administration (FHA) and the Veterans Administration (VA) are both governmental entities that guarantee mortgages. Borrowers must meet certain requirements in order to qualify for an FHA or VA guaranteed loan.

Basically, mortgage insurance works like this. Let’s say that you want to buy a home that sells for $264,000 – that was the average price of a home in the U.S. in October 2007. A 20% down payment would be $52,000. Not many people can come up with that much cash all at one time. If you can make a down payment of, say, $15,000, a private mortgage insurance policy will be written to insure the balance of the usual down payment, and the premiums will be added to the monthly payment.

Many people do not realize that the PMI policy can be canceled after the mortgage has been reduced and/or the home has appreciated in value.

In the past, buyers were not informed that mortgage insurance could be canceled when the loan-to-value ratio decreased to a certain point – usually 78%. The Homeowner’s Protection Act of 1998 made it mandatory for companies to inform buyers each year about the terms and status of their mortgage insurance and give them the option to cancel when it was no longer required by law.

Private mortgage insurance or PMI as is known is a form of insurance new homeowners are required to purchase. This is particularly so if their down payment is 20 percent or less of the property’s valued price or sale price. The main reason for private mortgage insurance is to protect lenders in the case the new homeowner defaults on their home loan.

Although private mortgage insurance has a bad reputation since it only protects lenders, it is actually a good thing. Reason is it has allowed millions of people to be able to buy homes with smaller down payments. Previously, these people would not have been able to afford a home had the down payment remain the same. Another important reason is private mortgage insurance can help you qualify for home loans.

Cost of Private Mortgage Insurance

The cost actually varies depending on the mortgage loan and the monthly down payment. Usually, it is half a percent. To calculate your private mortgage insurance, you can use this estimated formula:

Annual private mortgage insurance = 100 – (percentage of down payment paid) * (sale price of house) * 0.05

Let’s take an example. Suppose you brought a $500,000 house. You pay a 20 per cent down payment. So using the formula as above:

Annual private mortgage insurance = (100 – 20) * $500000 * 0.005 = $2000

Your monthly mortgage insurance will be around $167.

One important point to note is you should always keep track of your payments and notify your lender when you have reached 80 percent equity of your house. Even though the Homeowner Protection Act requires lenders to notify you of how long it will take you to pay, it is still better to keep track of it yourself.

There are some cases where lenders make homeowners continue their private mortgage insurance all the way through the lifetime of the loan. This usually applies to high risk borrowers. Therefore your payment history and credit rating such as your FICO score plays an important part as well.

Some people hate paying private mortgage insurance for years. There are some ways around it.

One way is to pay more interest on your home loan. Some lenders will waive the private mortgage insurance requirement if you agree to pay a higher interest rate. Since mortgage interest is tax deductible, it can be a good idea to go ahead.

Another way to avoid paying private mortgage insurance is to prove to the lender that the value of your home has risen. If the value of your home has risen significantly, your home have already have the 20 percent or more equity you need to cancel the mortgage insurance. However, it does take time for the lender to verify your claim, sometimes as long as a year.

The world of insurance is a complicated one. It sometimes seems impossible to know when a policy is a wise investment or a total rip-off. When it comes to insuring a mortgage with a mortgage payoff policy it gets very complicated because there are so many different policies around.

Is it better to buy an insurance policy from a lender or from an insurance company? Should you have an accidental death policy? Or would a decreasing term insurance be best? This article will examine the two most popular types of mortgage payoff policies and shine some light on the subject of taking out an insurance policy that will pay off your mortgage in the case of a tragic event.

Accidental death policies

If you are paying a mortgage, it gives you a lot of peace of mind to know your mortgage will be paid off if you should pass away. Because of this, many mortgage lenders offer their own insurance policies. You should look closely at their policies, however because many times they are accidental death policies. This means, if you should let your cholesterol get high (even if this is done totally by accident) and because of this you have a heart attack and die, the insurance policy will not pay off the mortgage.

For your family to collect on an accidental death policy you would have to die via some unexpected event. Such an event could be as in the case of Mr. Gianelli who was one of Dr. Robert Hartly’s patients on the old “Bob Newhart Show.”

Mr. Gianelli was unloading a truck full of zucchinis, after he pulled the first zucchini off of the truck; an avalanche of zucchinis fell from the truck and thus, killed poor Mr. Gianelli! He was “zucchinied to death” and if he had accidental death coverage his family probably would have collected.

Watch for the fine print

There isn’t too many other ways to collect on an accidental death policy. If your plane comes down, but flying is part of your job, this type of policy will not pay. If you drive your car as part of your job, a death by car accident may be considered an occupational hazard and would not be covered.

In short, accidental insurance is like playing the lottery and you may want a more stable type of policy to protect your family than they can provide you. That brings us to the ever popular, “decreasing term insurance.” This type of policy is built on solid ground, but it does have a couple of anomalies you should look for.

Decreasing term

With a decreasing term policy, the face value of the policy decreases over time. This makes sense because your mortgage principal will decrease over time. So, an insurance company can sell these policies inexpensively because it is more likely they will be paying off late in the term, when the face value is little, than earlier in the term when the face value is high.

This usually makes a decreasing term policy a good buy, but here’s what to look for. Trace the face values of the policy throughout its history, usually 30 years. Then compare these figures with an amortization schedule of your mortgage. In many cases you will find periods within this insured term where you will be under insured.

Decreasing term vs. amortization

For instance, many times a $300,000 decreasing term policy will have a face value which will become lower by $10,000 a year. So, after 5 years the face value of the policy will be $250,000. However, on a $300,000 mortgage at 7% for 30 years, after 5 years $282,394.77 will still be owed.

Also remember, if all goes well and you live to pay off your mortgage in full, you will be left with no life insurance. So, the moral of the story is, make sure you have ample insurance, period. You should have enough to pay for all your post death expenses, not just your mortgage.

This is one of the cruel realities of life. Life insurance gets more expensive as we get older so the sooner we deal with the matter, the better. Yes, a decreasing term policy might be the answer. Certainly, it is far superior to accidental insurance, but make sure you use it as a supplement to another more well-rounded policy.