Mortgage Insurance and Related Products

For those who have opted for  a mortgage loan, a question arises as to what will happen if they lose their jobs, become incapacitated, or suddenly die. Their loved ones will wind up paying a hefty mortgage loan, or they could lose their house. In this situation, mortgage insurance (MI) will come to your rescue. By taking mortgage insurance, you are guaranteed for a repayment of a mortgage loan in the unfortunate event of your life. You can protect your loaned capital through unique insurance instruments.

Private mortgage instrument (PMI) and Mortgage Insurance Premium (MIP) is the two mortgage instruments available.

• PMI is to protect you from the lender in case you fail to repay your loan. Private companies offer this instrument and generally cover a large portion of your borrowed capital.
• MIP is meant to protect you if you fail to repay the amount on account of some unfortunate event in your life. Government insurance companies generally offer these products.

There are two types of rates of interest charged on mortgage insurance products.

• Fixed Mortgage Rate: In this type, during the process of borrowing money, the rate of interest charged will be fixed and will not change according to the market movements. The rate percent can vary between 12.5% and 25%.
• Flexible Mortgage Rate: In this case, the rate of interest can change according to market movements. It is variable, is sometimes called ‘floating’ or ‘adjusting’ rates and gives higher risk compared to fixed mortgage rate.

The primary reason to buy mortgage insurance is safety. It reduces the risk of your lender because he is assured of getting his money paid by the insurer. This consequently qualifies you for a higher loan that otherwise is difficult to get.

Features of MI Policy and Benefits:

• You can own a house easily: Millions of people can easily qualify to own their house because the down payment is small and affordable for many. 
• Protection for both investors and borrowers: Both investor and borrower are protected in case the borrower fails to repay the mortgage.
• Flexible Payment options: There is a flexibility of paying mortgage insurance in more than one way. There are borrower-paid, lender-paid, or split premium insurance plans available.
   

In case of a default on loan, the insurer covers the difference between the fair market value of the house and the actual amount the lender can get by selling the house. This is of great benefit to the lender because it allows the lender to recover the loan even if the property is not worth enough to pay off the balance amount on loan.

In the current economic climate, home buyers generally tend to avoid PMI due to its initial cost. 20% down payment is too heavy an amount for first-time home buyers to raise, as it could take their years of savings. On the other hand, the lenders would also have no incentive in lending without additional safeguards. To solve this deadlock, private insurance players are coming forward to offer home buyers access to mortgages.

Before the economic renaissance in India in 1990, the Indian mortgage insurance was an unorganized sector. They used to extend financial loans against any valid insurance of the borrower. India’s liberal economic policy post-1992 saw growth of manufacturing and infrastructural industries which gave a tremendous boost to the mortgage insurance sector.

Now the mortgage insurance sector is well organized and growing at a faster rate thanks to the huge real estate requirements in India. The age-old housing mortgage facility has now metamorphized into customer-friendly mortgage insurance companies. The growth is estimated to be of USD 18 billion sooner or later.

Apart from PMI, there is a Mortgage Protection Insurance (MPI) also. PMI is especially useful for the lenders as it recovers the unpaid amount of their loan from the insurance company. It does not cover the mortgage payment of the borrower due to unfortunate events in his life. MPI, on the other hand, will include the mortgage payment in the unfortunate circumstances of the borrower. So, lenders do insist upon the borrowers to take PMI because they are assured of getting the unpaid amount of their loan from the insurance company.

Mortgage-Related Insurance Products:

• PMI: We have already discussed this.
• MPI: In this instrument, homeowners can pay off the cost of their home mortgage in unfortunate events. The value of the coverage is equal to the outstanding balance due on the loan and policy termination date is same as the date scheduled for the final payment of the mortgage. In an unfortunate event, MPI will pay off the remaining balance on the client’s mortgage. Payment made to the beneficiary is duly marginalized depending upon the paid-up amount.
• Home Life Insurance: Even though it is not legally mandatory to have homeowner’s insurance, bankers do not provide financing without it. It becomes even more necessary if the house is located in a geographical area susceptible to floods, earthquakes, hurricanes or other such natural disasters where the lender can recover his balance loan through home life insurance.
• Homeowner’s Insurance: Depending upon the financial strength of the homeowner, he can purchase homeowner’s insurance of the amount as much as to rebuild the house if it is destroyed in the calamity. The price of such insurance is set by the type of construction, its geographical location, local fire protection provision, credit reports, etc.

The deductible that one can go for is, to pay more in monthly installments so that when the crisis hits, you are not burdened with a sizable deductible amount.

The homeowner can opt for a variety of coverages that depending on his financial status. Some of these coverages are:

• Property damage - Cost of repairing damages.
• Replacement cost - Amount to replace the damages without depreciation.
• Actual cash value - Cost of replacing home after depreciation.
• Personal liability - Protection against lawsuits resulting due to negligence on the part of the homeowner.
• Medical payments - To cover medical expenses of the injured on the homeowner’s property regardless of who is at fault.