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Should I take the mortgage insurance offered by my bank?

April 30, 2018

 

 

 

You are so excited!  You have purchased your first home.  It is your first major purchase and getting the mortgage financing has been stressful.  You are meeting at the bank to sign the papers.  After page after page of signatures they pass one more paper over to you to sign.  It is for mortgage insurance.  They say nothing other than "would you like to protect your mortgage incase something happens to you?"  It is only $4o a month, and so you think, why not.  After all it is important.

 

What you don't know is why the bank employee didn't tell you.  First of all, the reason they can't tell you anything is because they legally can't.  They don't have their insurance license.  They are just supposed to pass it over to you and let you make the decision.  This is 20 second decision could actually pay the employee more than the mortgage itself if they are on commission.  So it is pretty good incentive for a 10 second discussion.

 

One other drawback to Banks mortgage insurance is that it is actually underwritten when you pass away.  So you go for years paying the premiums.  If you pass away, they THEN go through all the doctors records ect to make sure you were being honest.  Why do they wait until claim time?  Because it is cheaper for them.  What does it mean for you?  If you answered a question wrong (because sometimes the questions are a little tricky), then they have the right to decline your insurance.  Your spouse (or beneficiary) will receive all the premiums you have paid, but the insurance itself will be null and void.  Some insurance offered by mortgage brokers is underwritten upfront.  So just make sure this is the case if you are getting this type.

 

Mortgage Insurance is also paid on a declining balance.  Obviously you will be paying your mortgage down with every payment.  So the $300,000 mortgage 10 years from now, may only be worth $200,000.  If you pass away, only this amount is paid off.  If you had regular term insurance for $300,000, your beneficiary could pay off the $200,000 balance and still have $100,000 left in their pocket.  I recently met a couple who didn't have a typical mortgage but only had a Home Equity Line of Credit.  The mortgage broker thought that it would pay off the whole thing if something happened.  I personally phoned the mortgage insurance company and found out that it too was paid on a declining balance.  So unless they are paying the heloc like they should be and paying it down the same as a mortgage, there is a good chance that it will not pay off the entire balance if something was to happen.

 

Another disadvantage of mortgage insurance is that the beneficiary is the bank.  So if you pass away, the money goes directly to the bank to pay off the loan.  With regular term insurance it is paid to your beneficiary.  So this means that they have the choice on what to do with the money.  With the bank being the beneficiary, if done directly to a bank, it may limit you to stay at that particular bank if there are any health concerns that come up, because if you switch lenders, the mortgage insurance does not come with you.  If you received it through a mortgage broker this is not the case, so it does make it a better option than getting the insurance directly from the bank holding your mortgage.

 

Even if you did sign on the dotted line and accepted the mortgage insurance, you are not bound to it for any length of time.  Meet with an insurance broker.  See if there are better options out there for you.  If there is, you can apply for this and then ONCE IT IS APPROVED you can cancel your mortgage insurance.

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