Mortgage Insurance

The nature of mortgage insurance

Mortage insurance is not the same thing as home insurance. Home insurance protects you in the event of damage to your home itself (fire, theft, and so on). Mortage insurance isn't concerned with the home itself, but with your ability to pay your premiums.

Why some banks require you to take out Mortgage Insurance

Some lenders will require you to have Mortgage Insurance as part of your mortgage agreement. This makes complete sense if you consider it from their perspective. By lending you what is often an immense amount of money, your bank is taking a big risk. They know from their statistics that even if you do all you can to pay off your mortgage, you could be impeded from paying by circumstances outside your control. Losing your job, falling ill, or being affected by macroeconomic change are all common reasons for being unable to pay off a mortgage.

Now, at this point you might want to object. "Isn't the point of a mortgagege", I can hear you saying, "that if you don't pay up, the lender can repossess your home?". That's true - but it often doesn't do the bank much good. The repossession process is expensive and time-consuming, not to mention being unpleasant for all concerned. And once they've repossessed your house, the bank still needs to convert it into cash, by selling it. Again, this will take up their time and their money, and they don't want to do it unless they have to. They'd much rather have a secure cash payment than have the need to employ bailiffs, estate agents and lawyers to repossess and sell your house.

Mortage insurance is almost always required by lenders if you have less than 20% equity, and may also be demanded in other cases. In fact, one of the benefits of mortgage insurance is that it allows people to buy a house with much lower equity, opening up the property market to many more people. Naturally this comes with its own costs and risks (doesn't everything?) and if you are just buying mortgage insurance because it is the only way to get a mortgage, you should probably reconsider whether you can afford the mortgage in the first place.

The Homeowners Protection Act and mortgage insurance law

1998 saw the passing of something called the 'homeowners protection act'. This introduces new law concerning mortage insurance, designed to protect homeowners from being forced into paying for unwanted mortgage insurance. One key provision of this act is that if you buy mortgage insurance, it will automatically be cancelled when you reach 22% equity. The act also requires that you be reminded about the chance to cancel your mortage insurance at least once a year. In sum, the act means that once you have got into mortage insurance, it is easier to get out again if you so choose.

Why you should consider Mortgage Insurance even if your lender doesn't require it

Not all lenders require borrowers to take out mortgage insurance. However, Mortgage Insurance remains a sound form of security, even if you are under no obligation to pay it off.

The reason why this is so is quite similar to why the bank wants you to take out Mortgage Insurance. The unpleasantness and expense of being forced out of your house is immense, even compared to the financial significance of being a homeowner.

Elements of mortgage insurance

Mortage insurance will always be aimed at assuming liability to pay off your mortgage in certain circumstances. But there are many variants, each covering payments in a different eventuality. A single mortage insurance policy will usually include cover for several of thee elements below.

'Life insurance' mortage cover will pay off your entire mortgage in the even of you dying. This makes sense if you live with your family, and you want to make sure that they can continue to live in the home in the event of your death. It doesn't make sense if you live by yourself, and if none of your friends or relatives will need to live in your home after your death. In this case, it usually makes more sense to allow the bank to repossess your home in the event of your death.

'Income protection' is more varied and less clear-cut. An income protection mortgage insurance policy will keep up your payments if you are unable to do so because you lose your income. This cold be because you fall ill, for example. It does not cover loss of earnings due to unemployment - for that, you will need MPPI (mortgage payment protection insurance), or ASU (accident, sickness and unemployment insurance). This is a sensible option if you are in long-term stable employment, and if you would be unable to keep up your mortgage payments if you lost your job. Note that many people will not be able to take advantage of this form of cover: it is generally only offered to those who have stable employment rather than contract, part-time or temporary work.