Insurance is a financial instrument that needs no introduction. As the name suggests, mortgage insurance provides financial security to the mortgage lender or homeowner in the event of setbacks. If the mortgage borrower defaults on the loan or something happens to him, such as loss of temporary income, etc., mortgage insurance will be a financial lifesaver.
Mortgage insurance is different from home insurance. Homeowners insurance protects the home in the event of a serious accident such as fire, natural disasters, repairs, etc., while mortgage insurance is supposed to protect the lender if the borrower defaults on the mortgage payments.
Working of Mortgage Insurance in the UAE
When you get a mortgage from the bank, there are some additional expenses that are added to the last amount of the monthly payment. Banks are generally associated with an insurance company to offer mortgage insurance. Mortgage insurance is an additional expense that is added to the monthly mortgage premium. The lender includes the cost of the mortgage insurance in the monthly payments.
Mortgage insurance premiums are paid monthly along with the loan installment. In some banks, the insurance can range between 0.3% and 1% and it can also be more depending on the profile of the applicant. As the term draws to a close, the value of the mortgage insurance premium continues to fall as the loan amount continues to fall. When the mortgage borrower is unable to repay the loan, the insurance will cover the loan payments.
Mortgage insurance account
The mortgage insurance calculation includes certain factors such as the down payment, the amount of the loan taken, and certainly the credit score.
When the down payment on the home mortgage is lower, the required loan amount will be higher. Mortgage insurance is calculated based on the amount of the loan. For example, if the loan amount taken is AED 1,00,000 and takes into account 0.5% of the mortgage insurance, then the insurance will be AED 500. This value increases with the increase in the loan amount.
How are mortgage insurance and credit score related?
Mortgage insurance is a protection for the lender in the event of a borrower default. Therefore, along with other factors such as the down payment and the loan amount, the credit score plays an important role in determining the value of the insurance.
An individual's credit score determines her financial ability and reliability. Banks and financial institutions take credit scores into account when lending money. If the credit score is bad, the lender should be more careful about the loan. So if the credit score is good, the lender will charge less for the mortgage insurance.
Banks and financial institutions have usually partnered with an insurance company to provide such loan insurance. Some banks give the borrower the privilege of choosing third-party mortgage insurance, while the insurance may be mandatory in others depending on the bank's choice.
Regardless of any insurance company, the borrower should not ignore the details of the mortgage insurance. They should check the terms and conditions of the insurance coverage and choose the one that provides good benefits at a value less than the premium.
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