Mortgage insurance plans vary widely

Policies allow for anything from erratic employment to death of homeowner

March 09, 2003|By NEW YORK TIMES NEWS SERVICE

No one takes out a mortgage expecting that one day he or she will not be able to make the monthly payments. But things can, and do, go wrong.

And anticipating those things - unemployment, a catastrophic loss, even death - some people buy protection. That can range from mortgages that allow a few missed payments to programs that provide coverage for personal catastrophes to insurance policies that pay off the mortgage.

Deciding which form of protection is best, however, typically involves crunching some numbers.

"Our plan is geared towards the financially savvy person," said Paul Pavlishin, manager of the single-family mortgage business for Fannie Mae, which buys home loans and packages them as securities. It is the largest source of residential mortgage funds. The plan Pavlishin was referring to is Fannie Mae's new Payment Power mortgage, which lets a borrower skip up to 10 mortgage payments over the life of a 30-year mortgage.

"What makes our plan unique is that when you skip a payment, you're not just skipping payment of your principal and interest, but you're skipping taxes and insurance as well," Pavlishin said, adding that the amount skipped is then added to the outstanding balance of the mortgage.

Those who participate in the program, he said, can skip two payments, consecutive or otherwise, in any 12-month period, with a maximum of 10 skipped payments over the life of the loan.

"This program is geared towards providing flexibility and convenience for the borrower," Pavlishin said. He added that the plan is ideal for those whose income stream might not be regular - commissioned sales representatives, for example - as well as those who want the ability to direct money into other investments when the right opportunity presents itself.

"It is also ideal for first-time homebuyers who do not have a 100 percent comfort level with being in debt," he said.

There is, of course, no such thing as a free lunch.

"There are two ways the borrower can pay for this," Pavlishin said. One way is by agreeing to pay a slightly higher interest rate - generally from an eighth to a quarter of a percentage point more - at the inception of the loan. The other way is to pay a "transaction fee" whenever a payment is skipped.

"The fee is based on the original amount of the loan," Pavlishin said. For loans up to $120,000, he said, the transaction fee is $100; for loans from $120,000 to $215,000, the fee is $170; and for loans from $215,000 to $322,700, Fannie Mae's maximum loan, the fee is $230.

"The fee is paid at the time of the skipped payment," Pavlishin said. Since the amount skipped is added to the outstanding loan balance, the monthly payment is reamortized, resulting in a slightly higher monthly payment for the rest of the loan period. The amount of the monthly increase will depend on such factors as the point in the life of the loan at which the payment was skipped and the taxes and insurance on the residence.

Being able to skip two payments every 12 months, of course, would be of little help to someone unemployed for longer than that. For such people, other payment protection products are available.

The Chase Insurance Group, a subsidiary of J.P. Morgan Chase, for example, has an "involuntary unemployment" program that pays the participant's principal, interest, taxes and insurance for six to nine months in the event the borrower loses his or her job.

Paul Petrylak, president of the company, said that the product, available only to those who have J.P. Morgan Chase mortgages, costs $25 to $50 a month for a $1,000 monthly mortgage payment, depending on the duration of the coverage.

Petrylak said the coverage is intended for customers who want to be "fully protected."

To benefit from the program, he said, a customer must have coverage for at least six months before becoming unemployed and must be able to qualify for state unemployment benefits.

Another program provided by Chase Insurance Group is called disaster mortgage protection. That plan pays the borrower's monthly mortgage payments if damage to the home requires the customer to move out while repairs are being made.

"It will also pay up to $100,000 on the mortgage balance in the event of a total loss," Petrylak said, adding that the cost of such coverage is about $12.50 a month.

Another form of protection available to borrowers is known as mortgage accidental death coverage. "This pays off the loan balance in the event of an accidental death," Petrylak said, adding that the insurance also pays the policyholder's beneficiary up to 10 percent of the original mortgage amount. The cost of coverage for a $100,000 mortgage ranges from $20 to $35 a month.

Chris Pearson, owner of an Internet-based insurance referral service, said that for those who are concerned that a serious injury or disability will make it impossible to earn the money needed to pay a mortgage, disability insurance may fit the bill.

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