Mortgage Repayment Insurance
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Financing companies try to sell mortgage repayment insurance to borrowers by extolling the protection such coverage can provide. For a small additional monthly fee which is added to the borrower's mortgage payment, protection is provided in case of the borrower's disability or death. In the event such a tragedy occurs, the balance may be paid off. Coverage like this can provide peace of mind to some families. If a surviving spouse could not make the monthly house payments on one income, then the family may consider purchasing this type of protection. But before signing up for the policy, the borrowers should review the exact coverage that is being offered, fully understand the policy's limitations, and evaluate whether this is the best use of their money. There may be better options that will provide the same or more protection for less expense. Additionally, borrowers need to be sure that they are not confusing private mortgage insurance, commonly known as PMI, with mortgage repayment insurance. These are two completely separate types of coverage.
Buying a home is a scary undertaking. No matter how prepared the buyer may be, closing on a home can be a time-consuming and energy-draining process. Multiple forms need to be signed as this major financial obligation becomes a reality. Facing all the paperwork can be overwhelming as borrowers sign their names based on a brief explanation of the purpose for each form. Seldom do buyers take the time to read all the fine print. As part of the process, the borrowers may be asked if they want to purchase mortgage repayment insurance. Though the coverage may sound good and the cost cheap compared to the other elements of the mortgage payment, no one should allow themselves to be even subtly intimidated into accepting such a policy. This is a time to ask questions about how much protection the policy actually provides and under what circumstances. For instance, the policies are designed to pay off the outstanding balance upon the death of the policyholder. But there also may be provisions for disability coverage. Questions need to be asked about the criteria for determining disability and how much coverage is available. Will the entire balance be paid off or will monthly payments be made? If the latter, then the borrower should find out how long this coverage will last. Are there amount or time limitations? What does the policy cost?
With answers to these types of questions, borrowers can begin to evaluate whether mortgage repayment insurance is worth the premium. Before making a final decision, potential policy-holders should determine what other types of coverage could be bought for the same amount of money. For example, many financial advisers suggest that individuals purchase life and disability policies that will provide enough funds to meet one's personal financial obligations. A basic rule of thumb is for a person to purchase a life insurance policy worth ten times his income. Of course, an individual's financial situation may require more or less coverage, but this is a good starting point. For the majority of people, term life insurance is cheap enough to buy a policy that will pay off the remaining balance owed on the family home in the sad event the major breadwinner dies. Spending money on a life and/or disability policies instead of mortgage repayment insurance also gives the surviving spouse more flexibility and options. With adequate life and disability coverage, the family will have the financial means to either pay off the house or to continue making the monthly payments. But a repayment policy means that money goes directly to the lending institution. The family has no choice in the matter.
The wisest man who ever lived, King Solomon, wrote: "It is better to go to the house of mourning, than to go to the house of feasting: for that is the end of all men; and the living will lay it to his heart" (Ecclesiastes 7:2). Death is a certainty except for those who are living when the Christ returns. Financial preparation for that certainty means that responsible wage-earners provide for those who are dependent upon their income. Purchasing life and disability insurance policies are effective ways to provide income protection. Purchasing a mortgage repayment insurance policy provides protection, too, but may not be as cost effective. Additionally, such policies provide little, if any, financial flexibility for the beneficiaries. This is why it's so important for potential applicants to review the offered coverage and to evaluate the cost of such policies against other alternatives.
Some people may confuse private mortgage insurance (PMI) with mortgage repayment insurance. But PMI is a different type of coverage. True, the borrower is the one who makes the PMI premium payments, but this coverage protects the lender, not the borrower. PMI is almost always required when individuals borrow more than eighty percent of a home's appraised value. Loans that are more than eighty percent are considered riskier than loans at less than eighty percent. PMI protects the lender in case the loan goes into default. Having PMI will not protect the borrower from having to repay the loan. Applicants without the financial means to put at least twenty percent down on a house purchase can get out of paying the required PMI by applying and being accepted for an eighty percent first mortgage and a twenty percent second mortgage. The main point here, though, is to remember that PMI protects the lender, even though the borrower pays the premium. The term, mortgage repayment insurance, protects the homebuyer in certain circumstances as dictated by the policy.
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