When you purchase a home, most lenders will offer you mortgage insurance by way of a checkbox on your mortgage approval. For many home buyers, this may seem like an easy way to protect yourself in an unfortunate circumstance. In fact, there is a common misconception that the insurance offered by your lender is actually required to obtain a mortgage through them. However, this is not the case; you are under no obligation to accept this insurance. In most cases, alternate coverage from a third party is the more cost effective option while also offering additional benefits in terms of lifestyle changes. Consider the following:
If you purchase individual insurance, that insurance stays with you whether you move to a new home, pay your mortgage off, or switch lenders upon your renewal. With mortgage insurance, your coverage is tied to that specific mortgage with that specific lender. That means if the mortgage is closed for any reason, you are no longer protected.
An individual policy allows you to choose the features that are beneficial to you because you are the policy-holder. Coverage offered through mortgage lenders is known as ‘group coverage’, and is owned by the lender. That means the features offered are the same for every mortgage holder.
Coverage Costs & Amounts
While your monthly payment amounts do vary depending on the features chosen and the individual policy holder, individual insurance costs less on average than mortgage insurance. Additionally, mortgage insurance premiums are subject to increase upon your renewal while a personal policy can have a guarantee to stay the same for the entire remainder of the policy.
In terms of coverage amounts, you will be making the same monthly mortgage insurance payment up until your renewal while the payout actually decreases. This is because mortgage insurance is set to cover only the cost of your mortgage, and the total remainder of your mortgage decreases over time as you pay it off.
With individual insurance, the payout amount stays the same and can cover your entire mortgage plus an additional amount of your choosing.
Perhaps the most significant reason to consider individual insurance over a mortgage insurance policy is the process for underwriting. With mortgage insurance, your medical assessment is not completed until after the payout is required. At this point, they can choose not to pay out the claim if they deem you unfit for coverage even after you have made regular payments to your policy.
Individual insurance providers generally complete the required medical assessment before the policy is put into place. This means if you are declined for any reason, it will happen before you make your policy payments and you can seek alternate coverage elsewhere.
A complete breakdown of mortgage insurance versus individual insurance is covered in our first-time home buyers guide. If you are looking to purchase your first home, contact us today! Our comprehensive guide will also provide you with detailed information about the home buying process, required documentation, and what to expect in terms of closing costs.