Should I Buy Mortgage Insurance?

Homebuyers, especially first-time homebuyers, are often confused by the mortgage insurance process. Notably, your unique circumstances and financial capacity will factor into whether you will need mortgage insurance at all. You should make an effort to educate yourself about mortgage insurance policies and know the advantages and drawbacks of various mortgage insurance options. Then, you can refer to your own circumstances and mortgage terms to decide whether to buy a mortgage insurance policy.

Buying mortgage insurance may benefit you because mortgage insurance lowers your lender's exposure to risk from your mortgage, which can help you qualify for a mortgage. Purchasing a mortgage insurance policy may allow you to qualify for a mortgage with a lower down payment than without such a policy. Buying a mortgage insurance policy can therefore increase your purchasing power and the range of property you can afford. Mortgages supported by a private insurance policy tend to be approved faster than those that are not. Additionally, if you later decide that you do not need mortgage insurance, many mortgage insurance policies can be canceled, which can help you save money in the long term.

On the other hand, mortgage insurance can be costly to you, the borrower, and it functions primarily to protect your lender. In some cases, you will be required to buy mortgage insurance before taking out a loan, while in other cases mortgage insurance is not mandatory.

Whether you will be required to buy mortgage insurance will depend on you, your mortgage, and your lender. Generally, if a borrower can only make a down payment less than 20% of the purchase price, lenders will require you to purchase mortgage insurance. On the other hand, if you make a down payment of at least 20%, you will probably not be required to pay for mortgage insurance.

Mortgage protection insurance, not to be confused with PMI or MIP, is not mandatory. Like other life insurance policies, you can decide for yourself whether to purchase mortgage protection insurance, which will pay the lender in the event you (or your partner) die before the mortgage is paid off. Lenders may advocate that you purchase mortgage protection insurance, but experts suggest that buyers refuse to buy mortgage protection insurance directly from lenders. In particular, avoid mortgage protection insurance policies that have limited payouts, which may not even cover the outstanding amount of your mortgage.

If you default on your mortgage, mortgage insurance will pay out to your lenders, not to you. You should weigh the cost of mortgage insurance against potential increases in interest rates or other requirements should you buy a mortgage without mortgage insurance. Of course, loans that require mortgage insurance do not give you the option to decline, and this requirement is common when your down payment is less than 20%.

Tellus TIP:

While there are some advantages to purchasing mortgage insurance, you should still note that you will be responsible for paying a flat-rate premium every year during the term of your mortgage. Your mortgage insurance costs, therefore, will stay the same even when your mortgage balance decreases.