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What Are the Pros and Cons of Mortgage Insurance Protection?

Article Details
  • Originally Written By: Mark Wollacott
  • Revised By: C. Mitchell
  • Edited By: Amanda L. Wardle
  • Last Modified Date: 21 August 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
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Mortgage protection insurance has many pros and cons depending on the situation of the homeowners, their location, and the overall value of the property, but in general the biggest benefits are peace of mind and accessibility while the most common drawbacks include added costs and disallowances and restrictions set by the backing company. It’s often easier for people to get this sort of insurance than many other sorts of coverage, though its terms can be more limited. People who are afraid of losing their homes due to occasional lapsed payments or who wish to protect their relatives from excessive mortgage bills in the event of untimely death often choose this protection, though in most cases it does increase the monthly payment — and depending on the policy, the qualifications for protection can be very stringent.

Mortgage Insurance Basics

Mortgages cover the cost of a purchase price for a property, and are essentially loans given by banks and other financial institutions to individual home buyers. The loans typically require a deposit, commonly known as a down payment, to cover some of the cost, but people aren’t often able to front the whole purchase price. This is where a mortgage comes in. Repayment of the remainder of the mortgage loan is spread out over a set number of years against a fixed or variable rate of interest.

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People who fail to make timely payments risk foreclosure, which is when the lending institution reclaims the property. Owners usually lose not only their homes but also all of the money they had paid to that point. Mortgage insurance protection is a form of payment protection insurance (PPI) designed to protect against foreclosure in these circumstances. A mortgage loan assumes that the buyer is able to make payments each month until the loan is repaid, but provides temporary protection in case he or she is unable to. Stated differently, PPI helps to protect the buyer from unforeseen events that may impact the ability to make mortgage payments, such as illness, job loss, and death.

Peace of Mind

Perhaps one of the biggest “pros” of this sort of insurance is the peace of mind it can give to homeowners. This is often particularly true for people who are elderly or who have health conditions that cause them to worry that they may die before they’ve had a chance to pay off the house. Plans typically ensure that the insurance provider will pay off the loan if the mortgage holder dies. Among other things, this means that anyone who might inherit the property will not inherit debt.

Insurers will also usually pay out if the property is foreclosed upon or if the homebuyer is unable to keep up with payments due to unforeseen circumstances. Most of the time these sorts of “emergency” payments are limited to a short period of time, typically 12 months, but they can give owners one less thing to worry about in times of crisis or distress.

Accessibility

Mortgage insurance protection is sometimes also easier to obtain than other types of coverage, like life or health insurance. It is usually offered on a guaranteed acceptance basis, too. This means that not many questions are asked during the application process, and there also tend to be fewer reasons for rejection. One downside of this sort of application process is that the amount of money someone will pay each month in insurance contributions depends on the size of the mortgage, the age of the buyer, and his or her health, which means people that are considered “risky” may end up paying more — but almost everyone will be covered at some price.

Avoiding Personal Debt

Another potential advantage concerns personal debt. In some places, national and local governments will step in to provide relief to homeowners who aren’t able to make their mortgage payments for whatever reason, but in almost all cases this sort of assistance only comes in one the owner has depleted all of his or her personal savings. In practical terms, this basically means that the person must be bankrupt. This is not generally the case with mortgage insurance, and payouts under these policies can in many instances actually prevent an escalation in personal debt.

Added Costs

In most instances, payments for protection are added to mortgage loan payments the moment they’re purchased, which increases the amount of each monthly payment. This isn’t always a downside, but it can be for buyers who aren’t prepared to pay more than they initially envisioned each time the bill comes. Homebuyers must decide whether the potential benefits of the plan are worth the extra costs.

Finding the best rate can also be negative for many people. Many banks offer mortgage insurance protection, but they typically charge more for coverage than independent providers. Many different vendors will sell this sort of insurance, and it often takes a lot of time and energy to research the best deal.

Restrictions and Disallowances

These plans frequently come bundled with a number of restrictions and limitations, too, which can seriously impact how advantageous they really are. Insurers commonly won’t pay anything until the homeowner has made at least six months of continuous payments into the program, for example. Companies may prohibit certain illnesses and pre-existing conditions from being valid reasons for a payout, too. Furthermore, coverage is often declined for people over the age of 64 and those with temporary or short-term contract jobs.

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