Mortgage Insurance - A Blessing or a Curse?

Every day¸ thousands of individuals who purchase homes also purchase mortgage insurance from their mortgage broker. This can be a rather expensive and costly mistake for struggling individuals trying to get their financial lives in order. Recently a young client of mine purchased mortgage insurance from a lender and discovered that it's best to...

Never¸ Never¸ Ever Buy Mortgage Life Insurance From the Mortgage Lender!

The issues he should have considered prior to his insurance purchase include:

1) The only option available to the beneficiary¸ upon the insured's death¸ is to pay off the mortgage with the proceeds of the insurance policy. The beneficiary may benefit more by investing the money or using it to pay for a child's education. The bottom line is that the beneficiary may be left in a "house rich-cash poor" position.

2) In the event the policyholder should develop health problems he may be left in a "uninsurable" situation. He's stuck with that specific lender and their insurance policy. The lender would not have to offer him the best interest rate at the time of renewal and the option of "shopping" for a mortgage may be lost.

3) A mortgage lender will offer a buyer a decreasing term insurance policy. This type of policy¸ while cheaper¸ may mean that every time the policyholder uses the prepayment privilege (weekly¸ biweekly¸ or lump sum prepayments)¸ the amount of insurance coverage decreases. It may be in the best interest of a mortgage buyer¸ under the age of 35¸ to consider purchasing level term insurance. This type of insurance maintains the same amount of insurance on the policyholder throughout the life of the insurance policy.

4) Younger homebuyers may be wise to buy more life insurance than "just enough" to cover the mortgage. Generally¸ insurance costs start to climb dramatically¸ for both men and women¸ at about age 33-35. If one is contemplating a future move-up¸ it may be wise to buy more insurance prior to reaching one's 33rd birthday when insurance is cheaper and may better suit one's needs. However¸ the buyer may be wiser¸ especially if less than 35 years old¸ to buy "level term" insurance. This type of insurance maintains the same amount of insurance coverage throughout the life of the mortgage even though the amount owing on the mortgage decreases.

5) To qualify for a mortgage a general rule of thumb is to be able to show three years of income tax returns and financial statements. The buyer may have instructed his/her accountant to deduct every available expense that is legally deductible to better help qualify for the mortgage. However¸ this could be a costly mistake for a struggling entrepreneur if he/she fails to realize that the low income being reported on the tax returns may be misinterpreted by the mortgage lender. The low-reported income may severely restrict the budding entrepreneur in qualifying for the mortgage due to the high debt-servicing ratio. Most lending institutions will be unlikely to lend to self-employed individuals who place themselves in this situation. The solution is to find a middle ground of claiming all deductible expenses and paying your fair share of taxes. This in turn will pay huge dividends in the long run when purchasing real estate.
Source:
insurance news

Stewart Hobden - President and co-founder of Businessmatch-maker.com Inc.