It seems like these days you need insurance for every aspect of life. You have your health insurance, home insurance, car insurance, life insurance and now you need to think about mortgage insurance? If you are considering purchasing a home in the Okanagan in the near future, you will need to understand what mortgage insurance is in order to determine if it is a worthy investment for your family.
What is Mortgage Insurance?
Mortgage insurance offers protection in the event that you are no longer able to make your mortgage payments (knock on wood). Once you are unable to continue paying for the cost of your mortgage due to illness or accident, the insurance will kick in and pay off the balance up to a certain amount. In essence, mortgage insurance is really just a type of life insurance designed specifically for the funds that you owe against your home.
What are the Benefits of Mortgage Insurance?
When you walk into one of the “big banks”, many financial terms will be tossed around and it becomes difficult to understand what is actually required in the home buying process and what is just an added unnecessary product or service. The team at John Antle Mortgages understands your frustrations and always makes the process of obtaining a mortgage simple and transparent. You are already investing hundreds of thousands of dollars into a home and you want to ensure that every penny that leaves your pocket is beneficial to you and your loved ones. So the question then becomes, what benefits come with mortgage insurance? Is it really worth it?
-Potential For Superior Interest Rates: There are some situations where a lender will be able to offer you superior interest rates if you have already secured mortgage insurance. They are able to do this as they recognize that their total risk is mitigated by the insurance, allowing them to give you a few extra points without the concern of default. Of course, you will have to do a quick cost-benefit analysis to see if the money you save from interest fees outweighs the negative cash flow of your insurance premiums.
-Greater Chance of Being Approved: If there is less risk involved for the bank, they may be more willing to accept your application for a mortgage, even if you are self-employed or have fluctuating income sources.
-Potential Protection if You Lose Your Job: If you have consistently fulfilled your premium payments, your monthly mortgage payments could be covered by the insurance company if you temporarily lose your source of income. Every policy is unique and should be carefully analyzed, however, this feature can be extremely valuable for a family that relies on a sole individual for income that is very early, or late in their careers.
-Smaller Down Payment: It can be extremely frustrating if you are ready to purchase a home and have a great source of income but have not yet had the time to build up a large down payment. Some financial institutions will lower your required down payment if you have mortgage insurance.
-Transfer Insurance from One Home to Another: The current trend in mortgage insurance is to offer policies that are transferable when you move to a new home. This was not always the case, so again, carefully inspect your policy and ask any questions you have upfront before signing.
Are There Draw Backs to Getting Mortgage Insurance?
Just like anything else, you must carefully analyze the costs or drawbacks of any product or service. It is easy to be enticed by slightly lower interest rates and down payments without fully considering the impact mortgage insurance will have on your financial well being.
-Cost of Premiums: With other forms of insurance, such as health insurance, you get discounts depending on your lifestyle. For example, if you are a non-smoker, you will pay smaller premiums for life insurance than someone who regularly smokes. When it comes to mortgage insurance, these facts are not taken into consideration, and everyone pays a similar premium related to the value of the home.
You must consider your overall financial state and your health levels before signing up to pay premiums every month. In some cases, it makes more sense to invest in another form of insurance, such as life insurance, or make regular investments into a retirement savings plan.
-Benefit of Insurance Declines Overtime: As the years pass and you start to pay down your mortgage, your premiums stay the same. This means that even though you continue to pay the same amount for insurance coverage, that insurance is worth less to you as the homeowner every day.
-Bank Beneficiary: Mortgage insurance is designed with the bank’s risk in mind so they make themselves the beneficiary. If you decided to choose life insurance instead, you are able to choose your own beneficiary, which is usually a family member or spouse. If something happened you to, your family may need funds for other things than paying off the mortgage. Mortgage insurance is a specific protection, so in some situations, it may not be ideal.
May Not Be Required: Do you already have life insurance? What are your other costs? Your current policy may be enough to cover the cost of your mortgage along with your other obligations. You may also adjust your life insurance policy if you have been utilizing term solutions, which could fluctuate to fit your mortgage protection needs the next time you have to renew.
After reviewing some of the drawbacks, you may be hesitant to consider mortgage insurance. The fact is, deciding to take on a mortgage is a massive financial decision, and unfortunately, life throws us a curve ball once in awhile. As a savvy homebuyer, you need to thoroughly understand your financial situation and put safeguards in place to protect your loved ones in case an unfortunate situation occurs in the future.
There are many products on the market to provide financial protection and it can be difficult to decide what best fits your needs. It is always best to find a financial organization or team that you trust who can provide an educated answer to all your questions. We always recommend doing your own research and asking for references when dealing with a professional such as a mortgage broker or real estate agent.
When it comes to mortgages, the John Antle Mortgage team can answer all your queries and secure a mortgage that saves you thousands of dollars in the long run. Just ask our clients, we fight for our customers and consistently find the lowest interest rates!