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For most people, a home is the biggest purchase they ever make and requires borrowing a substantial amount of money. Taking out a home mortgage usually means committing to up to 30 years of monthly payments, but what happens if you can no longer make those payments due to circumstances outside your control?
Mortgage protection insurance is one way to protect your family from a loan default and avoid losing their home when you’re no longer around to pay for it. Even when you diligently make payments on the loan for decades, if you suddenly become disabled or die, you or your family may be unable to continue paying the monthly bill. If you have a mortgage protection policy, the insurance company will pay off the loan principal and interest, allowing you to keep your home.
Often confused with private mortgage insurance (PMI), which protects your mortgage lender against losses if you default on your loan, mortgage protection insurance protects you, the borrower. Although it’s not ideal for everyone in every circumstance, it does offer many homeowners extra peace of mind.
According to the Federal Deposit Insurance Corporation (FDIC), 48% of people in foreclosure due to a cash flow problem list death, disability, or serious illness as a factor. Although mortgage delinquency rates are declining overall, plenty of homeowners can no longer make their payments.
Many people don’t realize that, unlike other types of debt, their mortgage doesn’t disappear when they die. The bank still expects payment, and that responsibility will fall to one of the following:
But what happens when the person who assumes ownership of the property cannot afford to make the payments? In many cases, they sell the property; for example, many people who inherit a relative’s home choose to sell rather than take on the additional expense. The proceeds of the sale can pay off the mortgage.
Problems also arise if you die and don’t have a co-borrower, co-signer, or named beneficiary in your will. In that case, the executor of your estate must continue to pay the mortgage using the funds from your estate until the probate court can determine who gets the property. If the estate doesn’t have enough money to cover the payments, the executor can sell the home to pay the mortgage, which can create issues with heirs and inheritances.
Some surviving spouses or heirs use the proceeds from life insurance to pay off the house or continue making monthly payments after a mortgage holder dies. If they have mortgage coverage through a designated insurance policy, they essentially have life insurance for the mortgage. It provides loan repayment assurance for the bank and the homeowner, ensuring they can remain in their home for as long as they want.
In a sense, mortgage protection insurance is a type of life insurance. When you die, the insurer will pay off the balance of your home loan and interest by issuing a check directly to the lender. You can also make a claim on a policy if you can no longer work due to a qualifying disability.
The primary difference between mortgage protection and traditional life insurance is that a home mortgage insurance policy pays out directly to the bank rather than the policyholder’s estate. Life insurance pays the beneficiaries, who can then use the money for any purpose. Mortgage protection insurance only covers the home mortgage and interest and nothing else.
This means that even when the insurance payout takes care of the remaining balance on the mortgage, whoever takes (or retains) ownership remains responsible for other expenses, including taxes, insurance, and HOA fees. Some mortgage coverage insurance providers offer riders to cover these expenses.
Unlike PMI, which many lenders require when homebuyers put down less than 20% on the purchase of a new home, mortgage protection is optional. Whether or not you could benefit from this home loan security product depends on your circumstances, including your health, whether you have any other life insurance coverage, how much you owe on your home, and your wishes regarding your estate and who will inherit the property.
With that in mind, consider the pros and cons of purchasing a loan payment assurance product.
Mortgage protection insurance is a guaranteed issue product, meaning that you can purchase a policy regardless of your health or age. If you can’t secure life insurance because of your health or the rates are out of your budget, a mortgage insurance policy may be an affordable alternative and provide you and your family some peace of mind.
Mortgage payment protection can also provide parents with extra peace of mind, especially if they have young children who won’t be able to take on the mortgage if something happens. The fact that the policy pays the lender directly also makes managing your estate easier since there’s no need to deal with disbursements.
Carrying both mortgage and life insurance gives your family greater flexibility in allocating the life insurance payout. That money can cover your final expenses, pay off outstanding debts, or go to surviving family members for specific purposes, like education. There’s no need to use that money to pay off the mortgage, leaving more cash for other things.
The fact that mortgage insurance is most often a guaranteed issue product can benefit some people, but it can also be a significant drawback. Because buyers don’t need to go through underwriting, which can reduce the cost based on their health, occupation, and other factors, the premiums for a property loan safeguard are often significantly higher than life insurance coverage. In some cases, it’s less expensive to purchase more life insurance, ensuring enough money to cover a mortgage payoff, than it is to buy mortgage protection.
Another drawback to these policies is the diminishing payout. Mortgage insurance only pays the mortgage balance at the time of your death or disability, not the original loan amount. The longer you make payments, the lower the balance, but you will continue to pay the same premium for the life of the policy.
This means that as the policy ages, you’ll pay more for less coverage. Not to mention, if you pay off your mortgage before you die, you no longer need the policy and don’t get your money back. Putting that money in a retirement account or emergency fund may be a more effective use of those funds.
Homebuyers also have a limited window to add one of these policies. Most insurance companies require buyers to purchase a policy before or at the mortgage closing; a few offer more time, up to a maximum of five years.
Mortgage protection insurance is just one type of home loan assurance. It’s optional, but other policies may not be.
Lenders require homebuyers to provide proof of homeowners insurance to issue the loan. This coverage protects your home and its contents from losses due to catastrophic events like fire or storms.
Private mortgage insurance helps put home ownership within reach for people who can’t make a 20% down payment. If you default on your loan, the insurance will pay the lender a portion of what you owe on the loan, so they don’t lose as much money. Once you have 80% equity in your home (or pay off 20% of the loan), you can cancel this coverage.
If you take out an FHA loan to purchase your home, you’ll pay a 1.75% premium on the loan to cover the mortgage insurance. After that initial payment, you’ll pay an annual premium for coverage via your monthly loan payments. If you put down more than 10% on the mortgage, you only have to pay the premium for 11 years; if your down payment is less than 10%, you’ll pay the insurance premium for the life of the loan.
If you want to protect your mortgage and ensure your family has the money they need to pay off the house, use Insurdinary’s simple quoting tool to compare different insurance options. Whether you’re buying a new home and want to add mortgage protection insurance or you want to explore your life insurance options, we can help. With just a few clicks, you can review multiple quotes from leading insurers and choose the best one for your needs and budget.
Once you’re ready to buy, one of Insurdinary’s insurance experts can help you navigate the process and secure the mortgage protection insurance coverage you need. Let Insurdinary help you get more peace of mind and protect the things that matter most. Contact us with questions and get the expert advice you need to make wise decisions.