Mortgage Insurance: Getting the Facts

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There are two types of mortgage insurance that you should know about. There is mortgage insurance that protects the lender (the bank), and there is mortgage insurance that protects the borrower (the homebuyer).

In Canada, mortgage insurance that protects the bank is offered by the CMHC, the Canada Mortgage and Housing Corporation. The CMHC allows buyers to purchase a home without having saved up a down-payment worth 25% of the cost of the house. If you are planning on purchasing a house, but do not have the 25% down payment, your lender will arrange everything with the CMHC. You won’t have to deal with the CMHC yourself. However, it is wise to check out their website because they have valuable information on many aspects of housing.

In America, the function of the CMHC is performed by various private mortgage insurance companies. They often belong to the Mortgage Insurance Companies of America, or MICA.

The second kind of mortgage insurance is insurance that you can buy at the time that you get your mortgage. It is a kind of life insurance that is worth the balance of your mortgage. If you buy this insurance, you are making sure that if you die before your mortgage gets paid off, your dependants will not have the burden of repaying your mortgage: they will simply inherit the property. If you have a joint mortgage, the other party will receive full ownership of the house and not longer have to make any payments if you die. This also works in reverse: if your partner dies, you will receive the house.

Mortgage insurance to protect your beneficiaries is often offered by the lending institution that provides your mortgage. You have the offer of taking their insurance and you have the offer of declining it. It is wise to insure your mortgage, though you might not want to insure with your lending institution.

Before you get your mortgage, check out other insurance agencies to see what kind of competitive mortgage insurance rates are available. You will need to know that you have insurance before you go in to meet with your bank or lending institution. Your bank will probably insist that if you want their insurance you have to sign on the same day you finish completing your mortgage. Doing a little research in advance will help you establish if your bank is offering competitive rates. If your bank is offering competitive rates, it might be easier to insure through the bank so that you only have one monthly payment to worry about. Your mortgage insurance payment, if taken through the lending institution, will be bundled in with your mortgage payment.

If you move, your mortgage insurance cannot be taken with you: it has no portability. You will have to renegotiate your mortgage insurance as you move.

Your mortgage insurance payments will remain the same for the duration of your mortgage, even as the balance of the mortgage decreases.

To sign on for mortgage insurance, there is no physical examination. There is simply a form to fill out detailing recent medical history. You can often be automatically approved right in the office. If you have a mild health condition, sometimes it will take a little more paperwork, but you will often be approved within the week.

Because there is no physical at the lending institution, this means that smokers can get better rates on their insurance. Your bank bundles the rates for non-tobacco users and tobacco users together, and averages them out. Smokers will probably not find a better rate than their lending institution offers. Non-smokers, however, might be able to find a better rate at an independent insurance agency.

If you are the sole person in a mortgage, ask the bank who the beneficiary of your mortgage insurance will be. Different insurance companies have different policies. Often, if you choose to be insured at the lending institution, the bank is the beneficiary. This means that the mortgage for the house will automatically be paid off, and the beneficiary of the house will simply receive the house. If you choose an independent insurance agency, the spouse or next-of-kin is often named beneficiary, which means that they will have the option of immediately paying off the house, or of taking the money and continuing to make the monthly payments of the mortgage.

Like all insurance, mortgage insurance is a gamble. It is something that you buy for peace of mind, and something that you pay money for that you hope you will never use.

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