Mortgage Insurance and How it Protects Your Family and Home

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Investopedia defines Mortgage Insurance as “an insurance policy that protects a mortgage lender or title holder in the event that the borrower defaults on payments, dies or is otherwise unable to meet the contractual obligations of the mortgage”. This type of Mortgage Insurance exists to protect the lender, and goes by many different names such as Private Mortgage Insurance or Lender’s Mortgage Insurance. There is also Mortgage Protection Insurance which assists the borrower if they lose their job or become disabled, by covering the mortgage payments for a period of time..

With such similar titles, it can be easy to get Mortgage Insurance and Mortgage Protection Insurance confused. It’s important to remember the main distinction is that Mortgage Insurance protects the lender, while Mortgage Protection Insurance protects the borrower.

When Do You Need to Pay Mortgage Insurance?

Most borrowers require you to pay Private Mortgage Insurance when you put down a deposit of less than 20 per cent. This type of insurance exists to protect the lender in the case of a borrower defaulting on their loan. Banks require borrowers to take out Lender’s Mortgage Insurance when the loan is considered to be risky for them. If you have a conventional loan, you can cancel your Lender’s Mortgage insurance once you’ve reached 20 per cent equity in your home. According to Nolo, “the lender must automatically cancel it once the loan-to-value ratio gets to 78%”.

How Is Lender’s Mortgage Insurance Paid?

Once applicants are approved by both the mortgage insurer and mortgage lender, you can decide how you wish to pay your Mortgage Insurance. The most popular option people tend to pick is to pay a monthly premium. According to Owners, this is less costly at the outset, with annual rates “usually about 1 to 2 percent of the outstanding principal amount of the loan”.

A single-payment Mortgage Insurance policy is another option and can be purchased upfront. This can be purchased by the borrower, but also by the lender, agent, seller, or builder. Any closing cost concessions the seller is making can be put towards the single-payment Mortgage Insurance amount. If you as the buyer end up paying for it yourself, it may still cost less than the monthly premium option.

A 5 percent down payment on a $300,000 loan for a person with a  good credit score would see them paying around $167.50 per month in Private Mortgage Insurance, states smartasset. This would be about $7,000 after just three and a half years of monthly payments. Alternatively, the lump sum upfront single-payment would be $6,450.

Christian Durland, a senior mortgage adviser with Envoy Mortgage stated the single-payment option usually works out cheaper in the long run, “Eight times out of 10, if you run a proper analysis, the single-premium mortgage insurance always comes out as the less expensive option as long as you are going to be in the home for three or more years.”

The down-side to single-payment Mortgage Insurance is that it cannot be cancelled at 78%, as it is a one-off payment. However, this does not really matter if you have owned the property for more than three years, as you would most likely have saved money, regardless.

How Much Does Lender’s Mortgage Insurance Cost?

The amount of Mortgage Insurance you’re required to pay varies depending on how much the loan is for and what percentage your deposit is – for example, if you have a 15 percent deposit, you will pay less private mortgage insurance than if you have a 5 percent deposit. If you are looking to get an estimate of how much Lender’s Mortgage Insurance you will need to pay for a potential property, a variety of online estimation calculators are available to help you out, such as HSH, Drewberry Insurance, Lendi etc. These calculators allow you to enter various details regarding your loan, such as the price of the property, your deposit, and the state/county it’s located in, and then calculates the estimates accordingly.

Mortgage Insurance That Protects Your Family and Home

The type of Mortgage Insurance that helps protect your family and home is Mortgage Protection Insurance. According to Canstar, Mortgage Protection Insurance is “designed to protect the borrower in case of loan default, and also cover the cost of regular monthly mortgage repayments if you die, become seriously ill with a medical condition or lose your job”. The policy for Mortgage Protection Insurance is owned by the borrower, and it is a voluntary option for those who have mortgages. The cost of your Mortgage Protection Insurance is calculated by taking into account a variety of variables including the policyholder’s age, whether it is single or joint cover, and the loan amount. If it is joint cover, you and your partner may be insured for different amounts, dependent upon your incomes.

Benefits of Mortgage Protection Insurance

There are many benefits that come with having Mortgage Protection Insurance. Analysing one provider, Canstar outlined how policyholders could potentially receive a range of beneficial payments, although conditions apply. This included up to $1,000,000 if you die, to pay off your home loan, with any remaining money left over to be paid to your family for their free use. It also included up to $7,500 per month for up to 90 days to cover home loan repayments if you are involuntarily unemployed, and up to $7,500 per month to cover home loan repayments if you are unable to work due to injury or serious illness, for up to 30 months. For this insurer, the policy does not cover against pre-existing illnesses, and the disability and/or involuntary unemployment only counts if you are employed full-time or self-employed and working more than 20 hours per week.

This is just an example of some of the benefits that Mortgage Protection Insurance can provide to the policyholder. These features show why Mortgage Protection Insurance is something many new home loan holders consider.

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