Mortgage insurance is obligatory insurance required when a borrower gives a down payment that is less than 20% of a loaned amount. This type of insurance serves as protection for the lender in case a borrower defaults on payments. The premiums paid for mortgage insurance may be made through a large upfront payment or a monthly, quarterly or annual term. During the earlier years of the loan, each month, only a small amount of the loan is repaid, while the bigger amounts are repaid at the later part of the term. There are different types of insurance that companies may require a borrower to obtain, such as, mortgage disability insurance, mortgage protection insurance, or a mortgage life insurance.
The major differences between life insurance and mortgage insurance are the following:
- Mortgage insurance secures protection for the lending bank, while life insurance protects your family and yourself.
- Mortgage insurance can be arranged in equal monthly fees, with the payout decreasing over time. This can be quite expensive, while life insurance requires equal monthly fees, but the payout stays constant over time and is more cost effective.
- If you choose to move your mortgage to another bank, you will need to seek approval and reapply for a loan while for a life insurance policy, you permanently own the policy.
- Life insurance, therefore, gives you better security and protection. You can save on monthly premiums, and your death benefit will not be lowered over time.
Your house is probably one of your biggest investments and may also be your largest single source of personal debt. A sudden loss of income for you can put a heavy burden on your ability to pay your mortgage. Mortgage life insurance is one way you can protect your family. It is designed to settle the outstanding balance of a borrower’s mortgage in the event of earlier critical illness or untimely death.
A mortgage life insurance policy provides the borrower’s loved ones with death benefits guaranteed to be given in case something happens to the borrower. The funds earned can be used to pay off the loan or to continue the mortgage payments.
Mortgage life insurance premiums are determined at the outset and are guaranteed for the duration of the policy. Not all mortgage life insurance plans pay the same amount upon claim. Mortgage rates and costs, like health insurance rates, vary depending on the insurance companies’ way of calculating how the coverage of the life insurance should fall over the loan term.
Lending institutions are the common source of mortgage life insurance coverage, since it is usually sold when a new mortgage is purchased. It can also be purchased directly from traditional companies that also sell mortgage disability insurance, mortgage protection insurance, and life insurance at a lower cost, and with more flexibility. The death benefit of mortgage life insurance reduces over a set period of time, no matter where it is purchased.
Since consumers upgrade and improve their homes, insurance coverage is likely to increase as the years pass. The cost of the insurance actually increases, since a smaller death benefit is paid, while the coverage cost remains the same, and the mortgage’s outstanding balance decreases.