Why One Should Take Mortgage Insurance
Mortgage insurance is an insurance policy that compensates a mortgagee for any losses incurred in case a mortgagor defaults. In most cases, this policy is required in cases where the down payments made by a borrower are below 20%. The coverage offered by various insurers are varied and they are in most cases computed as a percentage of the property value.
This type of contract has its terms and conditions explicitly stated and countersigned. The premium to be paid is computed as a fraction relative to the overall loan value. In some cases the mortgagee pays the premiums on behalf of the borrower. That notwithstanding, the borrower in one way or the other foots this cost.
Such agreements usually have advantages and disadvantages. Such agreements ensure that mortgagees are not crippled by defaulting mortgagors. This lets them to concentrate on creating better products. More property buyers are able to access such facilities due to the willingness of mortgagees to finance them. The overall picture is that mortgagees experience increased sales turnovers and more people are in a good position to acquire property.
With this kind of plan, more home buyers are able to acquire homes. This raises the living standards of potential home owners. Without such a plan most mortgagees would be unwilling to finance some mortgagors. However, with the default risk spread out between the insurers and the lenders, lenders feel safer while advancing loans to high risk groups.
Most governments consider mortgage insurance as a deductible expense. This reduces the cost involved in acquiring mortgage loans while at the same time protecting lenders from incurring crippling losses. The tax liability of mortgagors is also further reduced.
Such plans are however not short of critics. Critics argue that since the insurance premiums are an inherent cost of the loan, such plans raise the overall cost of mortgages. This discourages people living on the margin from taking these loans. This has the detrimental effect of discouraging property ownership. Many people who are creditworthy are locked out from home ownership opportunities. The effect is multifaceted. Most of these people continually incur heavy rent expenses that they could alternatively have directed to permanent home ownership plans.
Another disadvantage of mortgage insurance is that it has increased the levels of bureaucracy in the industry. The average home buyer might not be in a position to understand the procedures followed. Legal expenses become a necessary expense in the entire process. Some unscrupulous businessmen use such complex arrangements to defraud naive home buyers. Others are even duped into spending on contracts are nonexistent in a strict legal sense.
Nevertheless, it is worth noting that mortgage insurance is worth taking. Its advantages by far outnumber its disadvantages. Proper legislation should however be developed to seal any existing loopholes. This will ultimately serve the best interests of both mortgagors and mortgagees ensuring greater satisfaction.
Having a house is a vision for everyone. However, a good house is an expensive matter these days. Thus, purchasing a house for most of us demands money that can be obtained through borrowing. If you become a borrower, you require mortgage insurance provided your down payment gets below 20% of valuated market value or acquisition value of the property you are going to purchase.
The mortgage insurance will not protect you. It prevents your lender from defaulting risk that you may make on the payments to the lender. Mortgage insurance are to be provided from both the private players and the government, the latter providing it even at below down payment of 3%.
On the other hand, Life insurance is an altogether unlike proposition. A life insurer will insure a person’s life for whole life span or for a certain period against any unlucky circumstance such as occurrence of death of the insured person. The insured amount which is sum assured is paid to legal heir of the insured or the nominee. The insured is expected to pay life insurance premiums for the period covered for risk coverage at agreed intervals.
Here below are some of differences between these two insurance types:
1. The borrower buys mortgage insurance to prevent the lender from any non-payment at the payday in settlement of payment by him. On the other side, the insured takes Life insurance on the insured own life to prevent his own family in the occurrence of his unfortunate death.
2. The borrower could stop mortgage insurance premium payment after the borrowed amount to value of the property mortgaged ratio achieves the 80% mark for private mortgage insurance; however, for the government mortgage insurance, for the life of the loan, the premium payment may have to be paid. In life insurance product, premium payment is set to be paid for whole time of insurance coverage.
3. These parties are taking part in mortgage insurance these are the insurer/the lender and the borrower, on the other hand, in the case of life insurance, it is fundamentally a contract between the insured and insurer.
4. Life insurance policy is purchased on the insured’s life. The amount of premium total at the final payday loans to be settled by the insured to the insurer is usually significantly less than the payment by insurer in life insurance case. In the case of the mortgage insurance, there is no refund of premium while this insurance is terminated.
5. Life insurance premium is often subject to tax, yet mortgage insurance premium is not always subject to tax.
My name is Alicia. I am a tech writer from UK. I am into Finance. Catch me @financeport