Mortgage Life Insurance: Advantages and Disadvantages
Posted on April 1, 2010
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When you are purchasing your house with a home loan, you can consider opting for mortgage life insurance. It is an optional insurance that helps your family members live in your house even if you die without repaying the home loan. The sum assured in this policy equals the outstanding balance on your home loan. The policy coverage ceases as soon as you pay off the loan.
What are the advantages of mortgage life insurance?
You can benefit by purchasing mortgage life insurance in the following ways:
- Get peace of mind: In the event of your death, this insurance policy pays off your outstanding mortgage balance and thus saves your family members from losing the house to foreclosure. The fact that your family members can live in the same house without repaying the home loan debt gives you peace of mind. Your family members also feel secure.
- Minimal requirement: No medical examination is required at the inception of the policy. If you were unable to purchase a term life insurance policy due to serious pre-existing medical conditions, applying for this mortgage insurance when buying your house will be a wise financial decision.
What are the disadvantages of mortgage life insurance?
The following are some of the disadvantages of mortgage life insurance:
- Decreasing benefit: The payout of the policy is fixed to your home loan balance. As the balance decreases, the sum insured also reduces. But the premium you pay each month remains leveled. Hence you receive less coverage for your money as time goes on.
- Benefit lenders more than you: In the event of your death, your family members will not get the benefits. Your lender will receive an amount equal to your outstanding home loan debt balance. If you survive the term of the home loan and successfully pay it off, you will not receive any benefit from the policy.
You can purchase a level term life insurance as an alternative to mortgage life insurance. The death benefit in level term policy remains the same through out the term of the policy. The payout can be used for various purposes including repaying your home loan. However, qualifying for a life insurance policy is comparatively difficult. Therefore, if you don’t have any other means of financially securing your family members, its best to purchase this mortgage insurance.
Mortage Calculator Guide
Posted on February 23, 2010
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Free Mortgage Calculator- Install different variables, then click the Calculate Button
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The words “mortage” or “morgage” are the two most common misspellings of the real word “mortgage”. If you misspelled it as “mortage”, you may have sounded out the word and did not hear the letter “g” and therefore missed putting the “g” in there. Likewise, if you misspelled it as “morgage”, you probably have sounded out the word and did not hear the letter “t” in there. Don’t feel bad as it is probably a word that is misspelled as often as it is spelled correctly.
A Mortgage Calculator is a very important tool to use when you are considering buying your first home. It gives some ideas about how much house you can afford. Most lenders will look at your monthly home mortgage loan amount to monthly income amount ratio needing to be in the ball park of about 30%. This figure is used to determine the amount they are willing to loan you.
For an example, let’s say your monthly household income is $5000. Let us also say that the bank is willing to lend you up to 30% of $5000 for a loan payment amount, that leaves you the other 70% of your monthly income to comfortably pay other essential bills for such things as food, clothing, utilities, etc. So, 30% of $5000 would calculate out to be a $1500 per month for a house payment. The next two important variables we need to look at are the length of time you will need to pay the loan back and interest rate you are going to get from the lender. Obviously, these two variables are something many borrowers shop around for to get the best combination.
The amount of time you need to pay the loan off might be 20 years, 25 years, or 30 years. Lets go with the 30 year loan repayment idea as this might be the best option unless you are close to your retirement years. Also, let’s assume for now that you are able to lock in a 6.00 % interest rate on your mortgage loan.
Using a mortgage calculator you can plug all of these variables in and it will tell you how much money you will be able to borrow, which will give you an idea of how much house you can afford.
With the right mortgage calculator, you would plug the three variables in from the above example, i.e., a $1500 per month payment, a 30 year time period, and a 6.00 % interest rate. These variables plugged into a mortgage calculator will give you a loan amount of approximately $250,000.00.
There are other thing to consider here. Let’s say, the lender requires 20% down from you and they are willing to give you the other 80% towards the purchase of your new home. And you have the 20% cash to put down on the new home. This calculation will show the purchase price of your new home as follows.
If the lender is willing to lend you the 80% of the price of a new home, and the 80% is equivalent to $250,000, let’s solve for the price of a home that you can afford. You simply take the loan amount which is $250,000.00 and divide by .80, and it will equal approximately $312,500.00 home that you will be able to afford.
Lenders have gained so much experience over time lending to home buyers that they know how much they can safely lend to them.
Their statistical lending guidelines keep them safe from lending a borrower too much money so that the borrower will not easily get into trouble.
This protects the lender from a bad loan, and also protects the borrower from getting overextended. A win-win for everyone.
A small percentage of borrowers do get themselves into trouble sometimes.
For more information also see bad deals.
