How Mortgage Insurance Companies Are Getting Rich

Mortgage Insurance Companies Are Getting Rich with Default Rates at All-Time Lows.  The good times are rolling for many American homeowners in 2017 and 2018. Only 5% of US homeowners were behind on their mortgage payments by 30 or more days in 2017, according to an analysis by the prominent data company Corelogic. That is the lowest mortgage delinquency rate since 2007. Also, the foreclosure inventory rate in February 2017 was .8% compared with 1.1% in February 2016. The serious delinquency rate of 90 days or more past due was 2.2% in February 2017 and 2.8% in February 2016.

Measuring early state delinquency rates and later default rates is important to analyze the health of the mortgage loan market. As of today, it appears the mortgage and housing industries are in a good state of health.

But despite this fact, mortgage insurance companies are continuing to charge for mortgage insurance and make a lot of money from it.

Mortgage insurance typically costs between .5% to 1% of the loan amount each year. This means if you have a $100,000 loan, you could pay $1000 per month in mortgage insurance. But the average home price is close to $200,000, so you could spend almost $200 per month on mortgage insurance.

If it is possible, it is highly recommended to avoid having to pay mortgage insurance, especially when you consider how low default rates are. Why should mortgage insurance companies get rich off of you with such a low chance of you defaulting?

But if you put less than 20% down on your home, you probably will need to pay mortgage insurance, or PMI. It is smart to try to save enough money so you don’t have to pay for PMI at all. Below are more reasons you should try to do without PMI and let the mortgage insurance companies get rich off you:

  • May not be tax deductible: Mortgage insurance was tax deductible as of 2017, but only if you had an adjusted gross income under $109,000 per year. This means many families with dual incomes will not be able to write off this expense. The tax write-off for PMI must be renewed each year, and it never for certain that Congress will act.
  • Heirs get nothing: Only the lending institution that wrote your mortgage gets any financial benefit from the mortgage insurance you pay. Even if you die, your heirs will not receive any benefit from your PMI policy.
  • Throwing money away: You must pay PMI until you have 20% equity in your home. If you have an FHA loan issued after June 2013, you will have to possibly pay PMI for the entire life of the loan! With a 10% or more down payment on an FHA loan, you can cancel mortgage insurance but only after 11 years. Even with regular PMI, you may take years to get rid of the extra payment. If you put that money into a good mutual fund investment, you could have tens of thousands of dollars in 10 years.
  • Difficult to cancel: If you have 20% equity in your home, you should not have to pay PMI for a conventional loan. But many lenders require you to send them a letter to cancel the policy. You may need to pay for another appraisal as well to determine if your home is worth enough to cancel the insurance. You may have to spend a few months canceling your PMI.

If you do not have enough money to put down 20%, you may use a piggy back mortgage. If you have a $200,000 home, and only can put down $20,000, you may use an 80/10/10 loan. This is where you have a first mortgage for 80% of the home’s value, a second mortgage for $20,000 and then $20,000 down payment.

You could avoid PMI by doing your home loan this way. But piggyback loans are viewed as riskier by lenders. Some of them are adjustable rate loans where the payment can go up or down. Others may be due to 15 or 20 years. When the loan becomes due, you must refinance it; what happens if your credit is not good enough to do the refinance? You could lose the home if you cannot pay the loan that is due.

PMI is expensive. Unless you think you can get 20% equity quickly, such as in high appreciation areas on the West Coast, you may want to save money to make a 20% down payment instead of getting PMI. With mortgage default and delinquency rates so low, it does not seem fair that you should have to continue to make a PMI payment for years and years. The mortgage insurance company gets rich, and you don’t get anything.