Job-loss insurance part of large mortgage family
Recently, we discussed a young couple’s decision to purchase a new home in a suburban development rather than an older home in an established neighborhood closer to some of their friends and longtime parish church.
In the end, the decision was swung by the efficiency and convenience of new construction and appliances. The couple, feeling stretched financially by the new home’s price tag, took some comfort in purchasing mortgage unemployment insurance from a family friend.
This coverage, sometimes known as job-loss insurance, will pay an individual’s monthly mortgage payment, including principal, interest, taxes and any escrow impounds, should the insured become involuntarily unemployed. Self-employed and seasonal workers typically are not eligible.
Variables include the type of job, geographic location and monthly mortgage payment amount. Payments are made directly to the lender or lien holder, not to the individual policyholder. Approximate premium costs average about 4 percent of the monthly mortgage payment, but the cost can vary greatly depending on the occupation or “insurable position.”
For example, if your monthly mortgage payment is $1,000, your mortgage unemployment insurance would cost about $40 a month. The policies can be extremely pricey and might not make sense for some borrowers.
Mortgage insurance is often used as a general term for low-down-payment borrowers, but coverage comes in a variety of forms of insurance for different services and needs. The most common other forms are mortgage life, personal (private) mortgage and coverage for reverse mortgages. Let’s take a quick look at those options:
- Mortgage insurance for a reverse mortgage: The mortgage insurance premium is a large part of the up-front costs of a reverse mortgage, a loan designed to allow homeowners age 62 and older the ability to tap into the equity in their home without making any payments. This insurance pays the lender in the event the senior outlives the value of his or her home. The most popular reverse mortgage product — the Home Equity Conversion Mortgage (HECM) — is administered by the government’s Federal Housing Administration (FHA).
Borrowers are charged an initial mortgage insurance premium (MIP) at closing, which is either 2 percent (HECM Standard) or .01 percent (HECM Saver) of the lesser of the appraised value of your home, the FHA HECM mortgage limit of $625,500 or the sales price. Over the life of the loan, borrowers also can be charged an annual MIP that equals 1.25 percent of the mortgage balance.
- Mortgage life insurance: Mortgage life is commonly offered each time you take out a conforming, “forward” loan. If you purchase mortgage life insurance for the full value of your home loan, your home will be paid off if you die. It is typically offered at closing and then again after you have signed. Its big selling point is that it permits the surviving spouse to stay in the home without using other assets to pay off the mortgage.
Often, the goals of mortgage life can be accomplished by purchasing a term life insurance plan. This option can be less expensive and stays with the individual, not the loan. If borrowers refinance, they must again state that they want mortgage life. Premiums vary depending on age, loan amount and smoker status. Coverage is still available if you did not accept coverage at the time you took out your loan or refinanced it. Ask the lender who wrote your loan, or the person who handles your homeowners insurance, for details.
- Personal (private) mortgage insurance (PMI): Because lenders consider borrowers who lack substantial down payments a greater risk than other homebuyers, buyers with less than a 20 percent down payment must buy private insurance to guarantee their loan payments. If the borrower defaults on the loan and the house is sold for less than the bank is owed, PMI will cover the difference. As mentioned, the coverage in a reverse mortgage protects the lender from the possibility of the borrower outliving the value of the home.
PMI is required by lenders; mortgage life is an option. PMI costs differ according to coverage. FHA borrowers are stuck with PMI payments until the loan is paid off. Most lenders require borrowers to pay 20 percent of their mortgage loan before removing PMI payments. The PMI Act allows homeowners with loans originated after July 29, 1999, and who meet specified requirements to have their PMI cancelled.
Mortgage insurance can be optional or mandatory. Make sure you know what program you are targeting before you sign.
Tom Kelly, former real estate editor for The Seattle Times, is a syndicated columnist and talk-show host.
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