Is Mortgage Insurance Worth the Cost?
When applying for a mortgage for your home or vacation home, it is likely that your bank or mortgage company will bring up the issue of mortgage insurance. In fact, they may even require that you take out a mortgage insurance policy. Mortgage is often explained by those who sell it as inexpensive insurance that will pay off the mortgage in the event of your death. That would free up your spouse’s remaining financial assets and reduce the burden on him or her.
But is mortgage insurance really worth the cost? In order to make that assessment, it’s important to understand what it really is. Mortgage insurance is a form of life insurance. Unlike life insurance, however, whose proceeds can be used for any purpose, mortgage insurance only pays down the balance left outstanding on the mortgage at the time of death. There is no flexibility to use the proceeds for any other financial obligations.
A mortgage may be one of your largest financial debts and would likely be paid off with the proceeds of a life insurance policy anyway. There are a few differences between life insurance and mortgage insurance that make the former a better choice for insuring your mortgage.
1) Life insurance premiums are often less expensive than mortgage insurance premiums for the same amount of coverage. The reason for this is that life insurance applications go though a rigorous underwriting process that weeds out bad insurance risks so that those who are in good health will get a low rate. Mortgage insurance, on the other hand, often doesn’t go through the underwriting process or goes through a much less thorough one. This means that the premiums have to cover even bad insurance risks. This raises the premiums for everyone.
2) Mortgage insurance premiums don’t decrease as the mortgage balance decreases so it becomes relatively more expensive over time. For example, if your mortgage is $200,000 when you first apply for your mortgage insurance policy, your premium might be $50 per month. You will pay the same $50 per month even as you begin to pay down your mortgage. A policy that would have paid $200,000 at inception might only pay the remaining $40,000 balance if you die ten years into the policy. A life insurance policy, on the other hand, always pays the face amount of the policy.
3) You can not choose which mortgage insurance company you deal with. Mortgage insurance is tied to the mortgage lender you choose. In some cases, they provide the insurance themselves. In others, they have relationships with insurance companies and you have to deal only with those companies.
When arranging your insurance needs, in almost all cases, life insurance is superior to mortgage insurance to protect your assets effectively. As always, discuss the options with your independent financial advisor.
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This entry was posted on Wednesday, November 11, 2009 at 11:16 pm and is filed under Investing in Real Estate, Mortgage Insurance. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
One Response to “Is Mortgage Insurance Worth the Cost?”
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Macclain Says:
November 21st, 2009 at 10:37 pm
Very well described the difference between mortgage insurance and life insurance.
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