What the mortgage companies are trying to do here is to protect themselves
in the event of a real estate crash (think back about a decade or so). If
you defaulted, the mortgage people would be left with a house that is worth
substantially less than the 90% they "paid" for it. If they had only put up
80%, there's less of a chance of them losing money. Also, the mortgage
company isn't going to wait around for the best offer, like you or I would.
They will sell for something below appraised value just to get out fast. I
think the insurance only covers the difference between current appraised
value and what the mortgage company initially put up (90%), but I'm not
sure. As far as how much you are paying for this, I can't say. I'd bet
you're being gouged. By the way, if you go the home equity line route and
the real estate market does take a nose dive, expect the bank to come
calling.
Regards,
Greg C.
To: casnet
cc: (bcc: Gregory A. Cuzzi)
From: Brandon_Keller@ncci.com
Date: 10/26/98 01:51:34 PM
Subject: Re: P&I Insurance
This mystifies me for the same reasons that you pointed out - the lenders
already have a great deal of protection. The only guess I have is that
mortgage rates are so low (compared to other types of consumer debt) that
there is no margin for this additional risk built in so they charge those
of us with less than 20% down to cover the potential losses and costs of
selling a "repossessed" house. It does seem like a lot of money for a
little risk though.
In addition to the monthly payment, you probably also paid a lump sum
Mortgage Insurance Premium when you closed - probably a few thousand
dollars. You get some of this back if you move within the next few years.
Otherwise it is gone. (This may only be for FHA loans. I'm not sure.)
The other problem is that I believe you have to keep paying the monthly
Mortgage Insurance Premium even after you have 20% down unless you
refinance. If you got a good interest rate now, you could lose it if
interest rates are higher when you refinance to get rid of the Mortgage
Insurance payments. (I have heard that you may be able to remove the
Mortgage Insurance Premium by writing a letter to the lender once you have
20% down, but I wouldn't count on it.)
There are creative ways to get around Mortgage Insurance such as putting
10% down and simultaneously getting a 10% home equity line of credit so
that you have 20% "equity." You pay a higher rate on the home equity line
of credit but avoid the costly PMI.
timothy.regan@zurich.com on 10/26/98 10:29:35 AM
To: casnet@lists.casact.org
cc: (bcc: Brandon Keller/BOCA/NCCI)
Subject: P&I Insurance
I had noticed the discussion on title insurance and it reminded me of
another type of insurance tied to home purchases that really bothers me:
Principal & Interest Insurance. I recently bought a new home and
discovered on my payment slips a monthly charge for P&I that is nearly
double the amount for my monthly home owner's insurance! Does anyone out
there understand this??????? I was told that until I have at least 20%
equity in my home (I only put down 10%) I would have to keep paying for P&I
Insurance; this, they said, was to protect the mortgage company in case I
defaulted on my loan. I may not be the sharpest knife in the drawer, but
if I stop making payments, doesn't the mortgage company get to (1.) take
the house, which more often than not appreciates in value, and (2.) keep
all monies that I've already paid?!?! It would seem to me that the
mortgage company is, for the most part, already protected; this isn't,
after all, second chance auto financing where the repossed car isn't worth
anything!. Then why are the rates SO HIGH? I have discussed this
insurance with other people in our department and they seem to be just as
mystified about it as I am. I would appreciate anyone's input on this.
Tim Regan
Universal Underwriters
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