MORTAGE INSURANCE

Mortgage insurance is generally required where the borrower is borrowing more than 80% of valuation. A typical policy protects the lender in case the borrower defaults and the property on resale would realise less than the balance of moneys owing.

The premium is a once only payment and is sometimes added to the loan. The cost will vary with the ratio of loan to valuation. See real estate finance. Mortgage insurance allows a borrower to borrow monies on a property that otherwise, the lender would not lend on. The insurance adds an extra expense and delay to obtaining a loan and the borrower should compare his/her options for example, buying a less expensive house now without the insurance and upgrading to the more desirable house at a later date.

There are two types:

1. mortgage insurance (which protects your lender)
2. mortgage protection insurance (which is supposed to protect you).

The two are very different and you should ascertain which one you have or intend to have.

You may not be as well protected as you think you are if you only have lenders' mortgage insurance. Most lenders require you to take out this insurance if your loan is for more than 80% the property's valuation. That insurance is granted as part of your loan approval process and the costs of the insurance are paid in advance; along with legal and other costs. While the costs can be substantial (eg a fee on a. $500,000 loan is about $2850) it's important to realise that this insurance is for your lender's benefit, not yours.

If you're unable to keep up your mortgage payments, it protects the lender from any losses it might make if it sells your home for less than the loan amount. That's great news for the lender, but the bad news is that the mortgage insurer can then come after you for the rest of the money. And it certainly doesn't cover any losses you make after the property has been sold.

AVOIDING MORTGAGE INSURANCE

The borrower should try and avoid mortgage insurance if he/she can. The simplest way to avoid the need for mortgage insurance is to borrow less than 80% of the property's value. But that's not a hard and fast rule. Sometimes lenders will demand mortgage insurance on loans of less than 80%of the property's value (eg low documentation loans) and some lenders will lend higher amounts without insurance. Many lenders also offer forms of mortgage protection insurance or loan insurance for borrowers.

These typically pay off your loan if you die or are permanently disabled, or meet your loan repayments if you're sick or injured and unable to work. Some will also meet your loan repayments if you're involuntarily unemployed.