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Often times in life there are things we want and things we really need. These things that we need tend to make our life much more comfortable and convenient. A perfect example of something that a lot of people think they need is a nice house. A place they can call their own, a place the family can make fond memories, a place they can return to at the end of a hard day’s work.
Although people want and want their own homes, many are financially unable to do so. In fact, according to several surveys and statistics, most people’s annual incomes are well below the asking price of most properties for sale on the market.
While the option of saving up to buy a home seems convenient, the truth is that it often takes too long to collect all that money. There is always the possibility to use your savings to deal with certain emergencies such as urgent medical treatment or any other unforeseen circumstance. It’s issues like these that make it incredibly difficult to save to buy a home for so many future homeowners.
Fortunately for us, it is for such reasons that mortgages exist. Thanks to mortgage loans offered by several financial institutions, many people were able to finance the purchase of their home. They not only helped people become homeowners, but helped them pay for these properties almost comfortably.
In this article, we’ll explain what mortgage loan insurance is and why you should consider having one. But before we get to the heart of the matter, let’s quickly remember what a mortgage is.
What are mortgages?
Mortgages are home loans made available to qualified clients. Unlike personal loans which can be used for several personal needs, mortgages can only be used for properties. In fact, the money you ask for is not given to you in cash or by wire transfer like it does with personal loans.
When you take out a mortgage, the lending institution purchases the property on their behalf. While you are authorized to live in the property, the deed remains in the name of the lending institution until you have fully repaid the loan. Once the loan has been paid off in full, ownership of the home transfers to the borrower.
Mortgages are a type of loan, but not all loans are mortgages. This is a type of secured loan, where the property to be purchased serves as collateral. If the borrower is unable to repay the loan, the property is liquidated to collect the debt.
While it’s possible to take out loans that can cover the full cost of a home, you’ll find that most mortgages only cover 80% of the home’s value. There are different types of mortgage loans that meet the needs of different categories of borrowers. However, fixed rate and adjustable rate (ARM) mortgages are the two most popular. Click here to learn more about other types of mortgages.
Once your mortgage application is approved and the property has been paid off, you need to make monthly payments. The amount to be paid monthly will depend on the loan amount, the interest rate and the length of the loan.
Fixed rate mortgage
A fixed rate mortgage is a mortgage where the interest rate stays the same for the duration of the loan. The borrower’s monthly payment also remains the same. This mortgage is also known as the traditional mortgage, and it is one of the most popular types of loans. This is generally a term of 15, 20 or 30 years, the most common being the term of 30 years.
- The monthly payments of principal and interest rates remain the same.
- One can comfortably plan other monthly expenses.
- It takes longer to build home equity.
- As the loan term is longer, you pay more interest over time.
- Interest rates are generally higher than those of ARMs.
Variable Rate Mortgage (ARM)
Unlike fixed rate loans, ARMs have fluctuating interest rates that are influenced by market conditions. Interest rates on ARMs are usually fixed for a few years before becoming variable rates. The initial interest rate of most ARMs is generally lower than market rates, making them a more attractive option for borrowers.
However, in the long run, they may become less affordable if rates rise significantly. If you are considering an ARM, you want to make sure that the loan has caps for the rate hike. This way you can make a more informed decision.
- Maybe save a lot on interest if market rates go down.
- Interest rates are lower during the early years of the loan.
- If market rates rise, the interest rate on your loan may increase sharply.
- The amount you pay monthly can fluctuate, making budgeting difficult.
What is mortgage loan insurance?
Mortgage default insurance (MPI) is a type of life insurance that protects your home if you die before you pay off your loan. This insurance is usually sold by banks and mortgage lenders. This insurance protects people living with terminal illnesses like cancer or people who work in dangerous jobs like mining or drilling oil rigs, and other similar jobs. Visit https://www.facilities.udel.edu/safety/4689/ to find other dangerous jobs.
In the event that these people pass on, what remains of their mortgage is reimbursed by the insurer. In this way, one can protect his family from huge debts or the loss of his home. Some MPI policies cover other events such as disability or job loss. However, these only cover mortgage payments for a limited period.
Why mortgage loan insurance?
The main advantage of MPI policies is that the beneficiary’s family retains their home in the event of the beneficiary’s death. Since death is something we are hardly prepared for, it can quickly turn a strong mortgage plan into a financial tragedy. But with MPI policies, you set up a plan that covers your family if death occurs before a home loan is fully paid off.
There are arguments as to whether buying mortgage protection insurance is a better decision than buying traditional life insurance. Although both have their advantages and disadvantages, they both exist to protect the families of beneficiaries. Before making a decision, it’s important that you do your research and consider your own family’s unique needs or circumstances.