Every person who signs a mortgage agreement finds themselves faced with the decision whether or not to select mortgage unemployment insurance. The decision to incorporate that additional monthly cost into your regular mortgage payment is one that is often based on fear of future job loss, and lack of information about what happens with a mortgage when you lose your job.
What is Mortgage Unemployment Insurance?
When you sign up for a mortgage, you'll be accepting the responsibility of making a payment that can range from $1000 to $3000, every month for up to thirty years. This can often feel like an overwhelming obligation. Lenders often take advantage of the fear that people have about being able to meet that obligation by offering mortgage unemployment insurance.
This form of insurance will cover the mortgage payment if you ever find yourself out of work. It typically comes with the following types of stipulations and limitations:
- The policy may not make payments until after you've been unemployed for 30 days.
- Certain forms of unemployment, like a union strike, may not be covered.
- Policies are often limited to six payments within a twelve month period.
- Not all policies cover unemployment due to disability.
- Many policies will not pay if you are unemployed within six months of buying the policy.
The Nuts and Bolts
There are many aspects of this form of insurance that you should consider before deciding whether or not to buy a policy when you sign up for your mortgage.
Single-Premium Credit Insurance
Banks and mortgage lenders always offered "single-premium" credit insurance on all mortgages. As the mortgage industry came under intense scrutiny for predatory lending practices, consumer advocates criticized this form of insurance as vastly overpriced and completely unnecessary. One of the major problems with single-premium insurance is that unscrupulous lenders would use high-pressure sales tactics to convince new or uneducated borrowers that the insurance is absolutely necessary. They would insert the premium, usually several thousand dollars, into the loan financing at closing. The cost of the policy would become astronomical because borrowers were paying interest on the single premium for the term of the mortgage - often up to thirty years.
Annual Premium Credit Insurance
Starting in 2001, mortgage lenders and banks responded to the criticism by repackaging the single-premium insurance product into a product where the premium is paid for as a yearly policy, renewable every twelve months. The newly-structured policy is an improvement because the lender is not simply trying to tuck the additional closing cost into the mortgage closing process. Buyers are provided an annual opportunity to review the insurance, to review the cost, and to refuse the insurance if they want to.
Is Mortgage Insurance Necessary?
If you are employed you may not realize that you are already protected by other insurance policies offered by your employer, such as long term disability insurance, or other products offered through your employer's personnel department:
- If you lose your job due to disability, you would be covered by your employer disability insurance.
- If you die, you'd be covered by your employer life insurance.
The only thing left to be concerned about is if you are fired from your present job. In which case, you could invest the premium into a savings account and store up at least six months worth of income, providing yourself your own "insurance policy" without paying premium payments to the lenders.
There are some cases when borrowers may need the security of this form of mortgage insurance:
- You are self-employed or retired.
- Your employer doesn't offer disability insurance.
- You have no other, less expensive option for disability insurance.
- You don't earn enough to save up a six month "emergency fund."
- You have children and need to insure your families financial security.
- You don't want to be in a position to have to go through foreclosure.
A final consideration should also be whether your mortgage would really be a primary concern to you if you lost your job. Many families who suffer through job loss often walk away from a home, and allow it to go through foreclosure. They move into an apartment and start their lives over. While foreclosure surely affects a person's credit history, the time it takes to recover after a foreclosure, and the actual risk that you may lose your job, doesn't usually warrant the added cost of this form of unemployment insurance.
When a new borrower is purchasing a home, there are enough fees and added closing costs already without having to add an additional one to the list. If you feel you're at risk and unprotected without this type of insurance, the best approach is usually to shop around to evaluate coverage and annual premiums offered. Your lender may be offering an over-priced policy.