Mortgage Insurance explained
An insurance policy that covers potential losses in the event of a house-price drop, regular mortgages are burdened by high premiums, but some lenders offer alternative options.
The average loan to value is 82% on a mortgage with a fixed rate. The annual ongoing cost is $1448 for most borrowers according to figures from Inside Mortgage Finance.
Renewable loans can be far cheaper as they depend on the insurable interest rate and have no upfront costs. A 36-month term at 2% could actually work out cheaper than a standard 12-month repayment plan even after fees and expenses - but it's worth doing your own calculations to ensure you're getting an appropriate loan product that suits your needs.
Some lenders offer no-fee products: a mortgage that has no upfront costs and takes you through to the end of the term. You pay only interest on principal every month and nothing else, but up to 20% of your savings can be stolen from the policy in the event of default.
Using a no-fee product with a fixed rate is also a risky move as interest rates could change, so you're potentially exposing yourself to payments that will increase in price.
When buying insurance through a mortgage insurer the costs are considerably higher than those quoted above, but there is some flexibility in terms of payment options and duration. Policy holders can get access to cash at short notice, or carry out scheduled repayments over some time period instead.
The property can be insured at any point in time: the premium will then remain, whatever the position of the insurance market.
On a mortgage with no fees, you're paying interest off your mortgage balance every month. The insurance takes care of your mortgage payments if you don't make them. You could save money by consolidating mortgages and enabling the insurer to make regular payments directly to your bank account on a fixed schedule. The annual cost may be $150-300 depending on repayments and whether there are scheduled payments or a cash payout option. Some people also consider it helpful to factor in cash costs when making their choice about whether to take out insurance.
The average home owner is pressured by mortgage payments, but this is what insurance through a mortgage should look like according to Adam Brett at Mortgage Choice. You pay the premium once a year, and then don't worry about anything else: if there's no need for a payout you've done the right thing. This may appeal to some borrowers. The insurance can be taken out on an existing home loan as well as on a new one, making it useful for people who are moving home or extending their loans over time. It can be arranged from a single phone call, and you're protected against all the negative effects of interest rates even if they change during the year that you've been paying your premium: you have insurance in place.
Mortgage insurance is available from the banks you usually deal with, or from specialist companies that specialize in providing insurance policies for new mortgages. We have listed a few of these below:
Owners of fixed-rate home loans can opt for a mortgage life cover plan. It is possible to insure a property against house price falls by taking out a term life insurance policy on the loan. There are no upfront fees and no policy lapse fees if you move. This means that the insurer will repay your outstanding mortgage balance at the time of death, if your policy meets certain criteria.
You can choose between several plans including level premiums, whose premiums increase according to the property's value (although there may be limits on what increases are available).
The cost of the policy will depend on whether you choose a single-premium or level-premium plan. The level premium is generally cheaper however, with the cash sum likely to be between $50,000 and $100,000. Some banks offer cheap insurance deals in addition to their standard mortgage products: check with your lender for more information but remember that the best plans are likely to come from insurers.
Mortgage lenders can issue policies even if they will not lend you a mortgage for a new home or loan (for example, if the value of your current home is too high).
Lenders will typically charge a fee or charge you a fee for taking out the insurance, so be careful that you are getting value for money.
The cost of it is $9000 over 30 years or $25000 over 10 years. It is an insurance policy that covers the mortgagor in the event of early repayment and late payment of mortgage loan (as well as reasonable costs). The policy is issued by mortgage insurers and life insurers with a minimum premium payable to release the policy. The insured amount is determined by having a mortgage on your property, an amount that you pay to cover the interest only period immediately prior to death or 36 months after death.
"The basic things to remember are that you need to make sure that you can afford regular payments for your mortgage, as well as house insurance and any other home-related costs, like maintenance."
"To make sure you have enough income left over to meet your other financial commitments, the monthly repayments are taken into account.
"This will leave you with a monthly surplus on which to build up an emergency fund."
"It is easy to get carried away and buy a property that is more than you can really afford. If this happens, and the value of your property drops significantly because of market changes or unforeseen events, like a terrorist attack or rise in unemployment figures elsewhere in the country, you could lose your home via foreclosure.
"It is always a good idea to consider mortgage life cover when buying a home."
There are other ways of insuring your house: in the event there's a loss, and you need to sell it, because of an inability to make repayments, or because you've lived there long enough and want to downsize.
These options are not suitable for fixed-rate loans: you would simply be paying off your loan every month instead of the insurance premiums.
Also be aware that some not-for-profit organisations provide mortgages with insurance as an additional benefit for people who meet certain criteria. You can find out about these organisations by checking through social services websites or the phone book.
You can find one such provider, Society of St. John, at the St. John's Foundation website .
Mortgage insurance is available from most banks as well as from specialist companies that specialize in providing insurance policies for new mortgages. We have listed a few of these below:
In addition to cover against mortgage defaults, you might also consider insuring your home against fire and flood damage; this is a good idea even if your home doesn't need it, because it's possible that you'll be issued with an insurance payout on top of your mortgage in case of disaster.
When you need it more is when you are having trouble repaying your loan. The reality is that many people find themselves in this position. They may find it hard to make repayments due to other financial pressures and may be forced to ask for a shorter repayment period. This may seem to be a good way out of the trouble, but it will also mean higher payments for the rest of their loan life, which can add up if they do not have good cash savings or extra source of income.
Another situation where mortgage life cover can be useful is when you want to sell or refinance your home. By paying off the property in advance, you can qualify for lower mortgage rate and lower monthly payment for refinancing or selling purposes.
Conclusion
"As a buyer, it is easy to get carried away and buy a property that is more than you can really afford. If this happens, and the value of your property drops significantly because of market changes or unforeseen events, like a terrorist attack or rise in unemployment figures elsewhere in the country, you could lose your home via foreclosure."
Buying a house can be quite an experience. You want to make sure you can manage all the financial commitments that will come your way: mortgage rates, property insurance premiums, repairs and maintenance costs etc. Although one day you may wish to move from your house into retirement or to begin a new career but before that day comes ensure that you have enough financial stability to meet these commitments with ease.