How is mortgage life insurance different than regular life insurance?
When you sign onto a new mortgage, whether it’s your first time or your fifth time, there is a lot of paperwork involved. The bank will ask you to square away your finances before you can sign on the dotted line because they want to make sure you’ll make your payments. One of the ways the bank further protects itself is by offering Mortgage Life Insurance.
Sometimes called Lender Insurance or Private Mortgage Insurance, this product is designed to pay off your mortgage in the event that you pass away and can no longer make payments. The concept might seem a lot like the life insurance package that you already have, but there are a few key differences.
Read More: Choosing The Right Kind of Mortgage
Mortgage insurance is sold by the bank or the mortgage lender. They will build the payments for this insurance policy directly into your mortgage payments. The price for this insurance is determined by the bank, so there is no shopping around involved.
- You know your mortgage will be paid off in the event that you pass way.
- The policy is locked into your mortgage term, so you do not have to review the policy every year.
- Usually doesn’t involve any lengthy medical questionnaires.
- The application process is usually quick and convenient as it is provided by the bank you are already working with.
- Because the bank determines the rate, you may not get competitive pricing.
- The policy will only pay off your mortgage when you pass away—the policy coverage cannot extend to any other debts or be used anywhere else.
- The amount of insurance decreases as you pay off the mortgage.
If your down payment is less than 20% of the total mortgage, you may be required to sign onto the bank-offered mortgage insurance. Opting out may cause you to forfeit your offered mortgage rate. Always ask your lender what the consequences of declining the coverage and they will let you know the terms. Sometimes, once you start paying off your mortgage and you build the equity up to 20%, you may be able to cancel the mortgage insurance before the entire mortgage is paid off.
Life Insurance is sold by many vendors including brokers and agents and who can offer many types of policies depending on your age, health, and the length you would like your policy to be.
- Competitive pricing with the ability to shop around.
- Your family can choose how to use the payout (this can also include the mortgage.)
- Prices are not affected by your financial situation.
- Terms can be altered and policies can be customized to fit your needs.
- The payout is an agreed-upon amount that does not decrease as the policy ages.
- Can be a lengthy application process with medical questionnaires.
- You may not be eligible for certain policies depending on your age and health.
- Some forms of life insurance, including Whole Life Insurance, can be expensive or out of your budget.
The bank may pressure you into mortgage insurance, and you may oblige because of the easy one-stop-shop feel. But, you have the right to consider other options. Take a look at your life insurance policy or look into purchasing one. Think about the possibility of a piggyback loan to avoid mortgage insurance.
Buying a home is a huge decision! Take the time to choose the option that suits you and your family’s financial needs best.
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