How Are Home Mortgages Secured?

Home loans are secured by the home or real estate itself. They are designed so that if the borrower is unable to make payments, the lender can take control of the property. If you should obtain a loan to buy a house, however, there are things you can do to protect yourself in the unlikely event that something would happen to prevent payments being made on the loan.

"Home mortgages are secured by real estate," explains Doug Perry, who has worked in the Consumer Markets Division of Countrywide Home Loans for 16 years. "In the unlikely event that the homeowner does not repay the loan, the foreclosure process sells the home, and the vendor can recoup the loan proceeds. A personal loan is a loan that is based on just the borrower's previous credit rating. Typically personal loans are done at significantly higher rates than secured loans. Another example of a secured loan would be an auto loan, where the asset behind the loan is the auto itself."

Mortgage Payment Protection Insurance (MPPI) can protect a homebuyer, however, in the event of the unexpected. It can pay your monthly mortgage payments for a specified period of time if you become unable to work for a time because of illness or unemployment or in the case of the death of the insured. You pay a monthly premium for this type of insurance.

To lower the price of the premiums, however, providers write the policies so that there are periods during which you will not be covered. For example, you would not be covered during the "exclusion period", a period of up to 60 days after you take out the policy, during which time claims for unemployment could not be made. Claims for accident or sickness would be paid. For that reason, even if you take out such insurance, you should make sure to have enough extra money to pay the mortgage for two months in an emergency. There is also an excess or waiting period of up to 60 days for each claim, during which no payments will be made.

The insurance will also not cover unemployment caused by your misconduct or sickness claims caused by preexisting medical conditions.

MPPI can be used even if you have a joint mortgage. It can allocate a specific portion of coverage to each person, such as 50/50 or 60/40, and can even make payments if only one borrower loses all monthly income.

It is also possible to purchase the insurance if you are self-employed or under contract. You should, however, check to see if it would then apply if you became unemployed.

While mortgage insurance can provide a safety net in case of the unexpected and helps some obtain mortgages they otherwise could not have, there are drawbacks. The extra cost may increase your mortgage rate by one percent. The mortgage interest portion of your monthly payment may not be tax deductible, even if the rest of your monthly mortgage payment is. In addition you may find it difficult to cancel your insurance payment once it is no longer needed. That is because it some lenders do not want to cancel the insurance, even if the chance of foreclosure is minimal.

Fannie Mae and Freddie Mac, the nation's largest owners of home mortgages require the loan providers that they service to cancel the mortgage insurance under certain conditions, such as if the loan has been in effect for two years, the borrower has paid on time, and the owner has achieved 20 percent equity in the home. Some lenders do not do that, however.

It could be that even after you have achieved 20 percent equity in the home and no longer need the insurance, you could still be paying $50 to $200 a month in unnecessary insurance payments. You can sue your lender in Small Claims Court to recoup your payments. You can also ask for a refund if your insurance is cancelled.

The best thing you can do, however, is work with a lender who is knowledgeable and whom you trust.

"You should be working with a lender who reviews all of the options and presents the advantages (insurance or other alternatives) for your individual situation and assists you in making the right decision," says Perry.

In short, if you obtain a home mortgage it will be secured by your new home. You do have options, however, to protect yourself against unexpected events.