When you are in the process of buying a home and obtaining a mortgage, be sure you understand what people are talking about when they talk about mortgage insurance.
One of the first mortgage insurance lenders will discuss, if you have a low down payment, is the purchase mortgage insurance which insures them against you not paying the mortgage.
Lenders feel they have to protect themselves when a lender has a small down payment. The concept 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 prospect. In a low or no money down mortgage, the buyer has risked no substantial amount that would compel him to protect his investment as much as possible.
The lender then requires that the buyer take out an insurance policy on the mortgage, but the beneficiary of the policy is not the buyer, but the bank. Note that the lender is the beneficiary, not the borrower or his family.
If you are concerned, as a responsible homeowner and family man, that your family will not be able to continue to afford the mortgage and live in their home if anything occurs to stop your flow of income, you may think about taking out mortgage life or disability insurance.
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 he passes on, mortgage life insurance would pay off the loan, and if he is disabled for any length of time, mortgage disability insurance will continue the mortgage payments in the interim. 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. If you start out with a $200,000 mortgage, after a few years you would have lowered the principal, so you do not want to keep paying the premiums on a $200,000 policy.
In the case of mortgage disability insurance, the amount of the monthly home loan payment will be guaranteed for the allowable term of the disability.
Take sure you are clear on the terminology that your bank uses when you are discussing mortgage insurance. Some lenders can be anxious to sign you up for mortgage life or disability insurance since they can make a commission from it, but if you are in a situation with a low down payment loan, your bank may only be talking about protecting his interests, not yours, when he discusses mortgage insurance with you.
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