Mandatory insurance in mortgage loans in Colombia
Among the most frequent requirements for the granting of a mortgage loan is the contracting of a life insurance policy by the mortgage holder. Although it is not mandatory, having a life insurance policy is highly recommended since in case of death or total or absolute permanent disability of the holder, it will be the insurance, and not the heirs, who will be in charge of paying the bank the outstanding capital of the loan.
There are life insurance policies associated with the mortgage payment. These insurances are contracted at the same time that the mortgage loan is granted, although it is not obligatory to do so with the bank that grants the financing. Depending on the type of premium payment we have chosen, we can find different types of life insurance:
At the time of contracting a life insurance, there is an important factor to take into account: the protection of the family against future unforeseen events, taking into account that the home may be a family home.
Private Mortgage Insurance
If you make a down payment of less than 20% to purchase a home, PMI will likely be added to your normal mortgage payment. For example, if you buy a $200,000 home, you will most likely need a $40,000 down payment to avoid having to pay PMI.
Generally, after you purchase your home, you can request a PMI waiver when you have reached 20% of your home’s equity. PMI is automatically canceled when you reach 22% of your equity.
Your down payment plays an important role in determining how much PMI you will have to pay. A lower down payment can represent a greater risk to the lender, which means they can lose a larger investment if you default and your home goes into foreclosure. Generally, a lower down payment also means that your normal mortgage payments will be higher and you will need more time to pay off the PMI. All of this increases the likelihood that you will miss a payment, which means you may be charged higher PMI premiums.
How much does a mortgage insurance cost
And it is advisable to be careful because not all banks clarify this point at the time of signing the mortgage. Many of them give bonuses on the credit conditions in exchange for taking out several insurances with them. That is to say, they lower the interest rate. But it is advisable to make calculations because it may be more profitable to pay a little more interest and not sign those insurances. In the long run, they could turn out to be more expensive.
At the time of contracting an insurance with the mortgage, besides the already mentioned obligatory one, it is very advisable to subscribe also another one. This is a life insurance for at least the amount of the mortgage and with the bank as beneficiary.
Mortgage insurance, in case of death
Mortgage loan repayment insurance is a life insurance policy that covers the holder of the contract in the event of death or disability on all or part of the capital owed on the mortgage, depending on the percentage we have insured. This can range between 50-100%. Thanks to this policy, family members will not have to continue paying the mortgage in the event of the loss of income due to the death of the head of the family.
It is important to underline that it is not a compulsory insurance. However, banks are usually insistent with their clients to contract this type of insurance at the same time as the mortgage, encouraging them with the prospect of benefiting from great advantages by linking this insurance to their mortgage.
However, nothing obliges you to take out this insurance with the same bank, as we have already mentioned. This is dictated by the new Law 5/2019, of March 15, regulating real estate credit contracts, which came into force in June 2019: