4 Questions to Mortgage Protection Insurance

4 Questions to Mortgage Protection Insurance What is Mortgage Protection Insurance?

Mortgage protection insurance is a type of protection for homeowners should they suffer a loss of income.  Depending on coverage, the insurance will make part or all of the mortgage payments on behalf of the homeowner and provide additional protections that will prevent the foreclosure of the house all together.  Some borrowers may be forced to accept an insurance policy if they have a low initial down payment or poor credit.  Interest rates may be significantly high for those whose mortgages pose a significant risk to the insurer. 

What are some factors that affect the affordability of mortgage protection insurance?

Agents will typically consider the following factors:

  • Location – if the agent determines that they area you live in is experiencing high unemployment and is likely to lose even more jobs in the future, the insurer will assess the likelihood that the policy seeker will lose his or her job.
  • Industry and employment weakness – if the policy seeker is employed in a field that faces poor short term prospects and/or long term weakness which will result in job insecurity, then that will increase the potential cost of the policy.
  • House affordability – if the policy seeker lives in an expensive house with high mortgage payments, this will surely affect the cost of the protection insurance due to the increased potential cost to the lender.
  • Economic projections – if there are indications that the economy will weaken, increasing the number of people experiencing income loss, policy costs for all policyholders increase to compensate for the added costs and risks assumed by the policy issuer.

Who provides mortgage insurance?

The Federal Housing Administration typically provides an affordable insurance option to Americans with low credit scores as private lenders’ rates increase dramatically below a credit score of 620.  From that point downward, insurance becomes highly unaffordable due to the private lender compensating to the risk of lending to individuals with a poor credit history.  Lenders may pay for insurance themselves and pass the added costs off to the borrower in the form of higher interest rates.

Why should I get mortgage protection insurance?

Despite its cost, this insurance is valuable as it will allow homeowners breathing room to seek new employment while keeping the risk of foreclosure at bay.  This is useful especially for homeowners with affordable homes, as their policies will cost substantially less and they will avoid a sizeable financial burden should they lose their income.  The added expense is also worth the cost for individuals living in the high risk areas as declining areas of the country will almost certainly cause unmitigated hardships for those living in affordable housing in that area.  One must also be aware of conditions built into the policy that allow the insurance company to deny coverage even if all payments are met.

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