Mortgage Insurance

August 23, 2006

 "Mortgage insurance" is one of the most ambiguous and least understood terms in the industry. This is because it can take on any of the following radically different meanings in different situations:

This is a one-time insurance premium you pay when buying a home with less than 25% down payment, or in a few other situations where a lender is not willing to take all the risk of lending you money. Some examples of this might be:

  • a non-standard dwelling such as a mobile home on leased land.
  • a rural property with non-standard utilities (well and septic systems).
  • a multiple-unit dwelling where you may or may not be occupying one of the units.

Insurance premium is standard, and on a sliding scale according to the percentage of the property value you wish to finance with this mortgage.

Mortgage Life Insurance

This is simply regular life insurance which is used to ensure that, in the event of the death of either of the borrowers, the mortgage will be paid off in full from the proceeds. Since this is not mandatory, an important question to ask of any lender who offers it is "who is the beneficiary?". If the lender is the beneficiary, it can be used by them to retire the mortgage in full…which may not be the survivor’s desired course of action, particularly if the mortgage is at a much lower rate than the survivor can earn after tax on investments. Mortgage Fire Insurance

All lenders, without exception, require that a fire insurance policy be in effect at the time they fund a mortgage…for the obvious reason that if an uninsured house burns down on a property they have mortgaged, the only remaining value is in the land. While this may not actually cause a loss directly, (due to the high value of many lots) the funds will be unavailable to reconstruct the building, and thus force a sale or re-mortgaging.

Mortgage Payment Protection Insurance

In recent years, it has become possible to buy income protection insurance specifically to ensure mortgage payments can be maintained in the event of not only disability (now a standard product), but also loss of employment.

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