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Greetings to all and a warm Welcome to New Subscribers.
Do a little homework before you buy mortgage insurance.
Weigh your options before you say ’yes’ to mortgage insurance...
If you have recently taken out a mortgage, you know that after you are approved and just before you sign the papers, you will be offered mortgage insurance from your mortgage lender. “That will cost you $8 per $1000 of coverage for mortgage insurance.” It may be convenient at the time but before you say yes to mortgage insurance, I would suggest that you weigh some of your options and some of the important issues.
Is it a fair price?
The reality is you will not know if the price is fair until you shop around. Once you start shopping around, you will realize how the price will vary from one institution to another. Lets look at the situation of Rebecca and Garry, who were recently approved for a $200,000 mortgage. Based on their ages 35 and 33, the bank offered them life insurance for $38.00 per month. Is that a fair price?
If Garry and Rebecca shopped around, they would find that they could buy mortgage insurance for $31.00 per month or 18% less than what the banks offered them. In addition to a savings on cost, they would also be getting some added benefits:
The main reason for the cheaper rates was that both Garry and Rebecca were in good health and both were non-smokers. To be fair, lets take a look at another couple Jenny and Steve who are both smokers.
Smoking rates make a difference
Jenny and Steve are also ages 35 and 33, but they are both smokers. As a result, their private $200,000 mortgage insurance would cost $50.00 per month while the banks would still offer their blended rate of $38.00. In this case there would be a 24% saving by going with the bank insurance instead of the private policy.
What is interesting is that if Jenny and Steve were three years older (age 38 and 36), they would jump into a higher category at the banks and their bank mortgage insurance would cost them $58.00. A private mortgage insurance plan would also be $58.00. The bank insurance plans typically provide age bands every 5 years. It can make a difference whether you are at the low end of the band or the high end of the band.
Not just about cost
While price is certainly important, it is not the only thing that matters when it comes to mortgage insurance. Here are some other important factors to consider before you buy mortgage insurance:
1. Ownership. With standard policies offered by mortgage lenders, you are part of a group policy as opposed to an individually owned policy. When you are part of a group plan, the biggest benefit is the price is driven by averages and the price is set to accommodate a group of unknown factors. As a result, the not so healthy person is likely getting a cheaper rate this route. On the other hand, the individual owned plan will be better suited to someone who ultimately wants to customize the options to their personal situation. In the case of the individual owned policy, you own the policy, you select the plan options and you choose the beneficiaries. With the group, the lender owns the plan and they are also the beneficiary.
2. Flexibility and portability. With a group plan offered by a mortgage lender you will only be covered for the amount of the mortgage. As you pay down the mortgage, so does the coverage on the life insurance policy. You will not be able to alter the plan, the coverage or convert the policy to another plan. Ultimately, a personally owned policy is going to give you maximum coverage and flexibility. If you feel you need more insurance coverage for other reasons, you can add it to the personally owned policy.
In terms of portability, it is common for individuals to switch mortgage lenders a few times depending on who is providing the best interest rate. The problem with moving mortgage companies is that you can’t move your life insurance policy with you unless you own an individual plan. You can’t transfer the plan and the coverage ends when the mortgage is paid off.
3. Death benefit usage and coverage. Under the group plan, the death benefit is paid directly to the mortgage lender to pay off the mortgage. With a personally owned policy, the death benefit goes to the beneficiaries and they can ultimately decide what they want to do with the money. One example was Rick who inherited money from his mother when she passed away. She had a mortgage and the insurance came through a personally owned policy as opposed to a group plan offered by the lender. Rick got the money from the insurance policy and ultimately decided to use the money to invest in other things. He rented out his mother’s home and had enough interest to cover the remaining mortgage payments because the interest rate was so low. Rick was thankful that his mother had a personal life insurance policy.
4. Guaranteed coverage and premiums. The bottom line is a policy owned by the group plan does not guarantee the premiums or the benefits. The policy can be changed or cancelled at any time. With an individual plan, you can establish premium guarantees. As well, you know exactly how much you policy pays on any specific date.
5. Health factors. With a group plan, you will pay the same rate as everyone else your gender and your age. As I mentioned, this can work for you if you are not healthy, a smoker or overweight. On the other hand, if you are healthy and you do not smoke, you may have a lot better options with an individually owned policy.
The bottom line.
There is no universal rule that can be applied to everyone when it comes to mortgage insurance. Ultimately everyone has unique circumstances and unique situations that require different solutions. As a result, it is not about whether a group insured mortgage plan or an individual plan is better or worse. Rather it is about which is better for you. I always recommend that you talk to a life insurance specialist when it comes to mortgage insurance. They can shop around for the right price, the right product and the best solution to fit your specific needs.
(October 1, 2004)
I trust this information will come in handy and help you to stay informed.
One Small Saving on your Interest Rate will be worth Thousands! in the Long Term.
I am looking for Groups of people that would like to hear Insider Secrets to how the mortgage
industry really works and how to save thousands of dollars on your mortgage.
Also tips and tweeks to maximize your borrowing ability. What are the benefits
of having a Mortgage Broker do the "Shopping" for you?
Feel Free to call anytime…
Dan Heon
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