Introduction to Mortgage Insurance

By Rachel Hammons

Mortgage insurance is a type of insurance paid to a lender of a mortgage or to an independent private third party as a security on the ability to pay a mortgage loan. This has both benefits for the lender and the borrower and can help even to lower the cost of the loan.

If someone has taken out insurance for mortgage and then finds themselves unable to repay the loan instalments, then the mortgage insurance will pay out that amount. In other cases the mortgage insurance company will offset losses for the lenders after foreclosure and resale of the mortgaged property.

This insurance for mortgage then provides a very important backup for both lender and borrower. For the lender it means that they won’t be left without getting their payments back, which would put them out of pocket. For the borrower meanwhile it means that they won’t be placed in increasing debt if they are unable to pay the mortgage. The problem here is that most people who can’t pay their mortgage repayments will be struggling financially, meaning that the last thing they’ll need is for the debt to continue to hang over them. At the same time this will mean that they are not required to put anything else up against the loan as collateral. If a borrower owned another property for example, they might otherwise have used this as their guarantee and risked losing two homes. Finally, mortgage insurance will mean that the lenders are able to lend the money confidently and know for certain that they are going to get their investment returned. This in turn means that the cost of the loan can be decreased.

On average loan insurance is around $55 a month, $100,000 finances or up to $1,500 a year. It’s important for borrowers to shop around for good insurance then to ensure that they get a good price. At the same time it’s also important to compare the policies, and to see what precisely you are covered for. This is crucial as many loan insurers will not cover for things such as existing conditions, meaning that a lot of people can get caught out for not reading the small print.

Many lenders will include an insurance in their loan. This is called ‘loan repayment insurance’ and is essentially the same thing as mortgage insurance (but more generalised). However it is important that you don’t just accept the insurance given with your loan, as often this has a very high APR as well as a far from comprehensive cover meaning you can almost always get a better deal going privately. Many lenders will add their loan repayment insurance onto the cost of the loan itself which of course means that you end up paying interest on your insurance too. Much controversy surrounds this area, as many lenders have been seen to be including insurance on their loans with fully informing the customers. As such when you take out a mortgage you should always ask about loan repayment insurance even if you don’t think you’re paying for it. If you are, then cancel it and take out a insurance for your mortgage.

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