Why Mortgage Insurance Is A Flim Flam
If you’re in the market for a new home and you’re considering a mortgage, you’ve probably heard of mortgage insurance. It’s often presented as a way to protect your investment, but in reality, mortgage insurance can be a flim-flam.
Mortgage insurance is designed to protect lenders in case the borrower defaults on their loan. There are two types of mortgage insurance: private mortgage insurance (PMI) and mortgage insurance premiums (MIP). PMI is required on conventional loans when the borrower puts down less than 20% of the purchase price, while MIP is required on FHA loans.
So why is mortgage insurance a flim-flam? Here are a few reasons:
Mortgage insurance is expensive
PMI typically costs between 0.5% to 1% of the loan amount annually, while MIP can range from 0.45% to 1.05% of the loan amount annually. That may not sound like a lot, but it can add up over time.
Mortgage insurance doesn’t benefit the borrower
Despite the fact that the borrower is paying for mortgage insurance, it doesn’t actually benefit them. If the borrower defaults on their loan, the lender will be paid back by the mortgage insurance company. The borrower, on the other hand, will lose their home and their investment.
Mortgage insurance is difficult to cancel
Many borrowers are under the impression that they can cancel their mortgage insurance once they’ve reached a certain point in their loan. Unfortunately, canceling mortgage insurance is not always an easy process. For PMI, the borrower must reach a loan-to-value ratio of 80% or less, which can take years. For MIP, the borrower must refinance their loan, which can be costly.
There are better alternatives to mortgage insurance
Instead of paying for mortgage insurance, borrowers can take steps to avoid it altogether. One option is to save up for a larger down payment. Another option is to look for lenders that offer “lender-paid” mortgage insurance, which eliminates the need for the borrower to pay for mortgage insurance.
In conclusion, mortgage insurance is often presented as a necessary evil when getting a mortgage, but in reality, it can be a flim-flam. It’s expensive, doesn’t benefit the borrower, is difficult to cancel, and there are better alternatives available. If you’re considering a mortgage, make sure to carefully consider whether or not mortgage insurance is the right choice for you.