What is Mortgage Insurance? Types and Benefits

What you need to know about mortgage insurance in order to be fully armed at a crucial moment? How to save on insurance? Which insurance company is better to choose? We will try to briefly and easily tell about the pros, cons and pitfalls of mortgage insurance in this material.

Mortgage insurance is an instrument of financial protection for the participants in the transaction: the one who purchases housing and the one who gives money for this purchase.

What is mortgage insurance?

In short and “scientifically”, mortgage insurance is a tool for financial protection of the participants in the transaction: the one who purchases housing and the one who gives money for this purchase.

Beneficiary: in mortgage insurance is the organization that issues the loan.

*Beneficiary under an insurance contract is an individual or legal entity entitled to receive a cash payment upon the occurrence of an insured event. The bank needs mortgage insurance to guarantee the return of the issued funds.

Mortgage insurance is necessary for the borrower to guarantee the fulfillment of debt repayment obligations.

Insurance will come to the rescue when, due to unforeseen circumstances, mortgage payments become impossible, as well as when the acquired property for some reason loses its value or ceases to be its property. Of course, provided that these risks are included in the insurance contract.

Why do you need mortgage insurance?

When buying an apartment on a mortgage, insurance ensures the security of the transaction for both the borrower and the bank. 

An agreement is concluded between the borrower and the insurance company, which guarantees that if the borrower is unable to repay the loan for objective reasons, the debt to the bank will be compensated by insurance. 

As a rule, the cost of insurance is included in the monthly payment that the borrower pays.

What are the benefits of mortgage insurance?

A borrower with insurance can expect a lower interest rate or a lower down payment. In addition, he will receive additional guarantees against unforeseen situations for himself and his family.

The bank is also interested in mortgage insurance because it reduces the risk of loan default.

Types of mortgage insurance

There are 5 main types of mortgage insurance.

  1. Property insurance.
  2. Life insurance.
  3. Title insurance.
  4. Borrower liability insurance against non-repayment of a mortgage loan.
  5. Insurance against job loss due to reasons beyond the control of the insured person.

1.Property insurance

Mortgage property insurance involves the same risks as conventional property insurance. This is a fire, explosion, natural disaster, illegal actions of third parties, falling solid bodies. The only difference is that the beneficiary in this case is not the owner of the apartment, but his creditor.

2.Life insurance

Life insurance includes the risks of death, disability, and temporary disability of the borrower. In the first two cases, the insurance company, upon the occurrence of an insured event, fully repays the debts of the borrower, and in the latter, it pays on its loan only during the period when the client is not able to work.

3.Title insurance

If you are an earl, baron or viscount, you do not need title insurance … If you bought an apartment on the secondary housing market, then insuring the title, that is, the title, is the right and wise decision. “Can anyone deprive a bona fide purchaser of the property?” – you ask. 

How else can! For example, if the deal to purchase your apartment by the previous owner is found to be illegal.

4.Borrower liability insurance against non-repayment of a mortgage loan

the name of this risk sounds like you can simply not repay the loan, and the insurance company will pay it for you. No matter how! In this case, after the expiration of the period specified in the contract, the bank will sell the property purchased with a mortgage, take the proceeds, and the insurer* , that is, the insurance company, will pay the balance on the loan.

*Insurer is a legal entity licensed to carry out insurance activities.

5.Insurance against job loss due to reasons beyond the control of the insured person

 If you are an employee and spend a significant portion of your income paying off your mortgage, then it is not superfluous to buy an insurance policy that provides protection in case of loss of work due to the liquidation of the employer or the termination of its activities.

Payments under such insurance will be made during the period until the insured * finds a new job.

*Insured is a natural or legal person concluding an insurance contract with an insurer.

How to choose insurance company for mortgage insurance?

The choice of an insurance company is an individual matter and depends on the goal pursued by the insured. But we still recommend paying attention to the following features:

  1. Reputation of the insurance company. See reviews and ratings online.
  2. The reliability of the insurer. Be sure to pay attention to the percentage of payments of the insurance company and the percentage of refusals. All this information is also available on the Internet.
  3. Direct cost of insurance. Calculate on calculators from different companies and correlate with the two previous points.

It would also be helpful to know the answers to the following questions:

  • How long does it take for the insurance company to review your claim?
  • Will they notify you about the renewal of the policy?
  • Is a medical examination required for title insurance?
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