wilner@quill.DEC (Ken Wilner DTN 381-2457 ZK02-2/N59) (11/13/85)
INSURANCE
There seems to be some confusion as to what is being talked about here.
I just recently bought a house and had to deal with four different types of
insurance.
1. Mortagage Like Insurance
This is an optional insurance provided through the lending institution which
pays off my mortgage in case the covered person dies. I believe it is similiar
to term life insurance except it depreciates with the outstanding balance on the
loan. We had a choice of not getting it, just getting it jsute for myself,
getting it just for my wife, or getting it for both of us. We choose not to get
it for two reasons. One, I can increase my life insurance enough to cover the
mortgage through work for less than it costs by purchasing the mortgage life.
Secondly, if I should die, with mortgage life my wife has no choice but to pay
off the mortgage. With term life, she can do with the money as she wishes. For
example, she could pay off part of the mortgage and invest the rest, or pay off
all of the mortgage. But this way she has more flexibility.
While in general, I wouldn't recommend mortgage life, I think each person needs
to look at their personal situation.
2. Private Mortgage Insurance (PMI)
This insurance was required by all the lending institutions that we talked to
(at least 10) if we put down less than 20%. It covers them in case we defaulted
on the loan.
Shop around. PMI programs differed significantly from institution to
institution. It cost us several hundred dollars in closing costs plus around $30
dollars a month. In shopping around we saw monthly payments of anywhere from
$20-$40 per month. The amount varies with the amount of your mortgage. As
mentioned in previous responses sometimes after you build up 20% equity in your
home some institutions will let you drop PMI, so ask up front. Ours wouldn't
give us any guarantees.
3. Title Insurance
This insurance was required by all the lending institutions that we talked to,
and has to be purchased though the lending institution. It covers the lending
instituion in case there is a defect in the title which was not uncovered in the
title search. They are covered for any money which they may loose because of the
defect.
Note that the lending institution only required us to purchase title insurance
for them. It was a one time payment of around $200 included in the closing
costs, but varied with the lending institution. Optionally, for an additional
$150 we could purchase title insurance for ourselves. We choose not to do it
based on the history of the property and in an attempt to keep very high closing
costs down. Again, I think you have to look at your personal situation to
determine if it is worth it.
4. Homeowner's Insurance
This insurance was required by the lending instituion and could be purchased
where ever we pleased. It covers you against fire, thief, vandalism, water
damage, etc. All the institutions we talked to required us to purchase enough
insurance to cover the mortgage which if you put down a small payment is much
more than you need. (The land and foundation will always be their even if the
building burns to the ground).
Our institution only requires to give them proof annually that we had a paid
up policy. Others that we talked to required the you to pay them a portion
of the estimated premium monthly we they hold in escrow until needed.
OTHER THINGS TO KEEP IN MIND WHEN GETTING A MORTGAGE
There are a lot of factors to consider when getting a mortgage in addition
to insurance. I thought I would include those here some of the ones we
considered.
Another thing that we found was that closing costs varied significantly from
institution to institution and sometimes varied with the particular type of
mortgage we were interested in. When shopping around ask what the closing
costs are, not what the points are. We ended up going with an institution
that had high points because the closing costs worked out lower.
Also keep in mind that the day of the month you close significantly effects
closing costs due to prepaid interest. If you have a 30 year loan (360
payments) month number 1 doesn't start until the beginning of the first full
month in which you live in your home. You have to pay interest at closing time
for the partial month. For example, if you close on Aug 2 1985 your first
payment will be Oct 1, 1985 which covers interest for the month of Sept. Your
last payment will be Oct 1, 2015. However, at closing time you have to pay the
interest in advance for the month of Aug. So if the interest is $20 per day you
will have to pay an additional $600 at closing time.
We basically had a choice of 3 different types of mortgages. Fixed, 1 year
variable, and a 3 year variable. Each one had different rates, and different
closing costs. The variable rates had different caps. When deciding on which
mortgage program to take we took into account how long we think we will own the
home, what is the worst and best case for the variable loans, and we factored in
the closing costs, and our estimated future income.
The bottom line, is you need to look at your bottom line, and ask lots of
questions.