Archive for March, 2010
Mortgage Payment Protection Insurance The Do’s And Don’ts
When you’ve taken out a mortgage you’ve make a long-term commitment to maintain the monthly repayments for the full duration of the mortgage. That’s going to be over many years but you’re making that commitment without the benefit of a crystal ball no one knows how your circumstances are going to change, for good or bad. So that must represent a big risk. Mortgage Payment Protection Insurance (MPPI) is one of a range of insurances that includes life insurance and critical illness insurance, which you can reduce that risk and protect your family’s finances.
The purpose of MPPI is to ensure that your mortgage repayments will continue to be paid if you’re off work for an extended period due to accident, sickness or unemployment. Just consider the risks that this type of insurance is designed to alleviate:
Home repossessions run at about 90 per day. Most of these are due to financial problems associated with unemployment.
One third of all people aged between 25 and 34 have experienced unemployment for more than a month.
During the term of their mortgage most people experience at least one period of illness, or the repercussions of an accident, which will keep them off work for more than 3 months.
If you have a standard repayment mortgage, you’re well advised to set the value of monthly MPPI cover to equal the value of your monthly repayment plus your life insurance and home & contents insurance premiums. However, if you have an interest only mortgage, then your cover also needs to include the monthly cost of the investment plan you’re using to repay the mortgage at the end of its term. Also remember that if your mortgage repayments subsequently change due to interest rate movement, then you need to contact your insurer and get the policy similarly modified. Oh yes, the nice bit if you claim then the income payout is totally tax-free!
11 Top Tips for buying
Mortgage Payment Protection Insurance
Don’t think that you can only take out MPPI when you arrange the mortgage. You can take out MPPI at any time.
Be aware that some mortgage lenders will try to pressurise you into taking out MPPI along with your mortgage. If this happens, make sure you find out how much extra the cover will cost each month and then get on the Internet and get a few competitive quotes. Most people will find savings of up to 60%!
Mortgage lenders will only quote you for the cover needed to meet your monthly mortgage repayments. Remember our advice to include cover for the cost of your mortgage life insurance, your home & contents insurance and the cost of any investment plan you have allocated to repay your mortgage (the latter item applies only to interest only mortgages).
If your employment is seasonal or casual you won’t be able to claim on an MPPI policy. Every policy has what are called exclusions and seasonal and casual work is just a typical one. Exclusions are the circumstances under which you cannot make a claim. Always read these exclusions before you take out the policy and if you can see that your circumstances mean that you’re unlikely to be able to make a valid claim, don’t buy the policy. In some cases, the policy exclusions will eliminate 50% of potential claims.
Don’t automatically opt for the cheapest MPPI policy. The conditions under which policies pay out do vary so check them out carefully. Premiums are always a reflection of the extent of the exclusions in the policy, the level of cover provided and the insurers general marketing strategy.
Don’t get confused by the different names given to MPPI. It can also be described as Accident Sickness and Unemployment Insurance, Payment Cover and Payment Care. Basically, they all do the same but remember to check out the exclusions!
Most policies state that you have to be off work for a minimum period of time before you can make a claim. The maximum period you’ll find is 60 days but many policies reduce this to 30 days – and some will then backdate the payment to the first day you were off work. You’ll find full details about these aspects in the policy’s Terms and Conditions. Always check these out before you buy and remember when you’re comparing prices, to compare like with like.
Don’t confuse MPPI with Mortgage Indemnity Insurance (MIG). Mortgage Indemnity Insurance p rovides cover for a mortgage lender for any losses the lender might suffer as a result of a property on which they provided a loan being sold for less than the amount of the loan. Any payout under a MIG policy goes to the lender, not you!
If you already have Permanent Health Insurance your may not need MPPI. Check out the terms of you PHI policy.
Be aware that there is a level of duplication between Critical Illness Insurance and MPPI. MPPI will pay you an income during the insured period for any illness that prevents you from working. Critical illness Insurance will payout a lump sum if you are diagnosed with any of the chronic illnesses listed on the critical illness policy. So if you have a critical illness claim, then you will almost certainly also have a claim on your MPPI policy. However, if the illness that’s keeping you off work is not listed on the chronic list, and all ordinary illness aren’t, then only your MPPI policy will payout.
Shop around. As with most types of insurance, the Internet is the cheapest place to shop and many sites will enable you to arrange cover immediately online. Try searching under mortgage payment protection insurance rather than just mortgage protection. That search term is totally specific and you’re bound to find what you want.
Mortgage Length Calculating Which Is Best
For many people, purchasing a home is one of the largest and most important investments they will make after their education. It is important to make sure you choose the right mortgage, one you will be able to pay off within a reasonable amount of time. You also want to make sure you choose a mortgage which has the right length of time.
The length of your mortgage should depend on your financial circumstances. It should also depend on your future goals. How much can you afford to pay each month on a mortgage while still maintaining a healthy amount of savings? Being able to save a reasonable amount of money each month will protect you in the event of an emergency. You will also want to save money for the education of your children and your retirement. These are things you will want to take into consideration when choosing the length of your mortgage.
Common Mortgage Terms
Most mortgages have a length of 15 or 30 years. While some companies do offer 20 year mortgages, the interest rates for 15 and 30 year mortgages are fixed. Because of this they are used more often than mortgages which last 20 years. If you choose to take a 15 year mortgage, your monthly payments will be much higher. This will mean that you will have less income available to save. A 30 year mortgage will give you lower monthly payments, and will allow you to save more money than you would save with a shorter mortgage.
Weighing Up Your Options
It is important to weigh the advantages and disadvantages of both options before making a decision. Long term loans will give your more disposable income to spend on whatever you wish. They are flexible, and will also allow you to invest money. You can pay more money on the mortgage when you have it available so that the total amount can be reduced. You are also given tax benefits by the government because you are paying interest for a long period of time. These loans are also the easiest to be approved for.
Getting A Cheaper Rate
At the same time, long term mortgages also have higher interest rates. Because you are paying a large amount on the interest, you will pay more money in the long term. It also takes a long time to build up equity in the home. Long term loans also require long term commitments. You will want to make sure you have stable employment.
How To Pay Less For Your Loan
Short term mortgages are able to be paid off much faster. They have much lower interest rates and equity can be built up very quickly. Because the interest rate is low you will pay less over the long term when compared to a long term mortgage. At the same time, your purchasing power will be low and you will not have many tax benefits. Short term mortgage loans are also hard to get approved for. These loans tend to have higher monthly payments.
Whether you decide to get a short term loan or a long term one, you will be able to refinance to change the length of the mortgage. If you decide a few years after setting up a 30 year mortgage that you earn enough to pay it off much faster, you can refinance the mortgage for a shorter length of time. If you have a short term loan and it is difficult to make the monthly payments, you can refinance it to a 30 year mortgage.
Choose the Best Deal
The most important thing is to sit down and figure out which option suits you best. You should look at your current income, how stable it is, and how much you will have left over after paying the mortgage every month. You should choose a home which evenly matches your level of income.
Mortgage Interest Rates 101
Many things affect mortgage rates – which is why they fluctuate. So it pays to understand a little about how mortgage interest rates are generated. The more you know about the economic factors that change rates, the more prepared you are to find the perfect home loan at an interest rate that’s perfect for you as well.
Market Conditions
When the Federal Reserve Board raises or lowers rates, there is usually an impact on the rate you will get for your fixed rate home loan, although it’s not as direct as it may seem. The Federal Reserve adjusts federal funds rate, which is the rate at which banks lend to each other. When federal funds rate decrease, we spend more, which can actually increase inflation. Mortgage rates tend to be longer-term rates that are affected by concerns about inflation, as well as other economic indicators like job growth. So it’s more accurate to say that mortgage rates are indirectly affected by the Federal Reserve Board, and more directly affected by what happens every day in active public markets. The market sets the interest rate, and then a margin is added to the index to determine your final mortgage interest rate.
Timing
Since interest rates change daily, the longer a lender locks in a rate, the higher the risk that the market will move against them. Therefore, you pay more (in points) for a longer guarantee. If interest rates appear to be on an upswing, it makes sense to lock in your rate. If they are steadily dropping, it makes sense to float your interest rate so that you can take advantage of a shorter lock-in period, saving you money.
Points
You can often receive a lower mortgage interest rate by paying extra points – mortgage costs that are up-front rather than built into the interest rate. Each point equals one percentage point of the total amount of the loan. For example, one point on a 100,000 loan is the equivalent of paying 1,000 to ensure you get a lower interest rate that saves you money over the life of your loan.
Credit and Payment History
A less-than-perfect track record may make you seem like a high credit risk, which means you’d only be eligible for higher mortgage interest rate loans. If you find yourself in this position, don’t worry – we have loans that could still help you make your dream a reality.
Credit and Payment History
A less-than-perfect track record may make you seem like a high credit risk, which means you’d only be eligible for higher mortgage interest rate loans. If you find yourself in this position, don’t worry – we have loans that could still help you make your dream a reality. Learn more about Bad Credit Loans.
Debt-To-Income Ratio
Your monthly debt obligations are calculated against your current income. The higher the ratio, the higher the risk which could mean a higher interest rate.
Loan-to-Value
The loan-to-value is the amount you need to borrow versus the value of the home you want to buy. The more equity you have or the more money you give as a down payment decreases a lender’s risk, often resulting in a lower rate for you.
Property Type
Lender risk plays a big part in your rate. For instance, a loan for a single-family home is less risky than one for a multi-family home because there are fewer variables. The less risk, the better the rate.
Occupancy
If you plan on living in your new home, you will probably get a better rate versus a loan on a rental unit, which carries more risk for the lender.
Loan Amount
The amount of money you borrow could affect the interest rate you get.
Mortgage Equity Withdrawal – The Refinancing Trend
Mortgage Equity Withdrawal is the formal name for equity refinance, reverse mortgages or simply home loans based on equity (as the security for the loan).
Mortgage Equity Withdrawal rose to 8.7 billion pounds in the second quarter of this year to its highest since the third quarter last year, official data showed (on Tuesday 4th Oct 2005).
Mortgage Equity Withdrawal is a measure of the equity Britons have extracted from their homes but which they have not re-invested in property.
Sharply rising house prices in the last few years have encouraged a trend where Britons refinance their mortgages to extract cash which many economists say has helped support spending.
The Bank of England said that Mortgage Equity Withdrawal was up sharply from 6.437 billion in the first quarter of this year although it is still well below the 14.5 billion seen one year ago, when house prices were rising more than 20 percent annually.
The Bank of England has since cut interest rates by a quarter of 1% to 4.5 percent which could support Mortgage Equity Withdrawal in coming months, particularly as there are signs that the property market may be stabilizing after a year of stagnation.
As a percentage of post-tax income, Mortgage Equity Withdrawal rose to 4.2 percent from 3.2 percent in the first quarter of the year but is well down on 7.3 percent seen a year ago.
” Mortgage Equity Withdrawal appears to have found its way into increased holdings of financial assets (equities, bonds) as much as extra spending,” said Geoffrey Dicks, UK economist at RBS Financial Markets.
“Generally the pick-up in Mortgage Equity Withdrawal is probably indicative of more `normalization’ of the housing market but while it is saved rather than spent, the policy implications are not huge.”
Official data last month (September) showed the saving ratio rose to 5 percent in the second quarter of this year from 4.5 percent in Q1 (also of this year).
Separate figures showed UK residential construction barely grew in September, putting in its weakest monthly performance since May.
But what does this mean in real terms?
There are several key points in this statement, these are:
1.People are refinancing their homes because of increased value
2.People are not necessarily spending the money on the property
3.People are not necessarily spending the money in the high street
These three points are important to all of us, not just the policy makers. Heres why.
Lets consider the first point, people are refinancing there homes because the equity has grown rapidly.
This statement tells us that the housing market although not sky rocketing as it was a couple of years ago, is none the less still rising.
The second point tells us that when people effectively withdraw this money it is not to improve the home itself, hence the equity of the property will not grow at a better rate than market rate.
The third point is perhaps most telling, people are not taking the money and spending it in a hap hazard manner but are potentially saving it (bonds, shares, bank accounts).
So what do this mean for us?
Well, its a bit of mixed signals heads up if you like.
The general population (property owners) are slipping into ever increasing levels of debt (if youre refinancing your mortgage or freeing up equity as the agents put it, you are effectively borrowing money) unless its a reverse mortgage.
People who are refinancing are not improving the quality of the property with the money and so if the market takes a fall their property will devalue as much as the next property (whereas if theyd returned some of the capital into improvements they would at least be sitting on a lesser slump in value).
Finally, and perhaps the most damming sign is that people are saving more, this is not a good sign. In a healthy economy the rate of saving is low, this is primarily because confidence is high (people arent worried about the bills or their jobs) but the fact that more people are now starting to save money rather then spending it means that the retail sector will be taking a hit, this means that the bottom end jobs will be in danger, this in turn has a knock on effect in the service sector and becomes a vicious circle the end result being market stagnentation .
But what this trend does illustrate quite simply is that you can potentially get more money back in savings interest than you pay out in refinancing interest so at the moment the smart moneys in equity refinance.