Nothing in life is ever free from risks, especially not the purchase of your home. Although the future may look good now, you never know what disaster lies down the road, whether it is a death in the family or being laid off from your job. The best way to prepare for these unexpected bumps in the road of life is to purchase mortgage insurance to protect yourself and keep your home from being seized by your lender and foreclosed if you cannot make your payments.
Mortgage Insurance
Mortgage insurance is a type of insurance taken out to reduce the risk for the lender, especially by borrowers who cannot make the entire 20% down payment. In order to qualify for mortgage insurance, you—the borrower—needs to pass strict standards and pay the additional premium, adding up to one percent to the interest rate. Mortgage insurance helps both the borrower and the lender. The borrower is not only able to qualify for a home sooner, but they have a lower rate of default with the insurance. On the lender side, it insures them against the borrower not repaying the loan. Another situation when lender may require mortgage insurance to be taken out is if you have a bad credit history.
In order to find out if your home mortgage insurance payments can be deducted, talk with your mortgage insurance company to see if they are tax deductible. Although your monthly mortgage payments will be higher with the mortgage insurance added on, a decreased tax payment may make the payments seem more appealing.
There are several varieties of mortgage insurance available: mortgage protection insurance protecting in case of death, mortgage unemployment insurance protecting in case of unemployment, and private mortgage insurance allowing you to purchase a home without a large down payment.
Mortgage Protection Insurance
Mortgage protection insurance will cover the insurance in the event that the primary person making the payments passes away. In mortgage protection insurance, you pay a fixed premium for the duration of the policy. If you die before the term ends, the insurance will then pay off the rest of the mortgage. When calculating the mortgage protection insurance, the lender will take into consideration your age, if you smoke or do not smoke, and the principal mortgage amount. Be sure to visit at least three mortgage protection insurance companies to find the best quote with terms and payments you can afford.
Mortgage Unemployment Insurance
Mortgage unemployment insurance will protect you in the event you become unemployed while the term of the mortgage is still intact. This policy will pay either part or all of a mortgage payment if the borrower loses his job involuntarily, allowing you to protect both your home and your credit if you are suddenly laid off. The policies vary if the borrower has become disabled, the amount of mortgage payments being made, and the specified period of unemployment before the policy will start making payments. Most policies do not pay if the borrower becomes unemployed within six months of getting the policy, preventing people from taking out mortgage unemployment insurance if they know they will be laid off within the upcoming months.
Private Mortgage Insurance
Private mortgage insurance is an insurance that lenders require from borrowers who are paying less than 20% in their down payment. This will protect the lender against a loss of money if the borrower is unable to pay off the loan so they will be able to recoup their investment. It also benefits the borrower since you will be able to purchase a home with a small percentage down payment, as low as 3% compared to 20%, with the purchase of private mortgage insurance. The charges of each policy changes depending on the size of the down payment and loan, but are typically up to one percent of the loan. Although not all lenders require the purchase of private mortgage insurance, the vast majority of lenders do require the insurance policy for protection.
Even though you may think that mortgage insurance primarily benefits the lender, it is still wise to purchase a policy if your down payment is lower than 20% of if you think you may be laid off in an upcoming month. Read the terms of the insurance carefully and protect yourself and your new home with an insurance policy.