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Should We Dump Mortgage Insurance?

Private Mortgage InsuranceQuestion: I have always felt that mortgage insurance benefits just a select few and if it were withdrawn or otherwise eliminated and people required to put at least 5 percent down and preferably not more than 10 percent, you would see huge home sale increases. People would also have a much easier time when they put down only 5 percent or 10 percent and do not have to pay that wretched mortgage insurance to some Fat Cat Banker when in fact they may have perfect credit, make all their payments in a timely way but still have to come up with an additional $200 or $300 each and every month which is not in any way deductible from an income tax standpoint.

Answer: You can, at this very moment, buy real estate without private mortgage insurance (MI). With good credit and 20 percent down lenders will be elated to provide financing for you.

However, if you want to buy with 3 percent or 10 percent down then lenders worry that they have too much risk in the transaction — and you, the buyer, have too little. To offset the traditional requirement for 20 percent down they instead accept VA, FHA or private mortgage insurance — all forms of mortgage insurance — from borrowers who either lack cash or prefer to use their capital in other ways.

MI is an insurance product that’s regulated by the states and the states require strong reserves. MI companies are generally “monoline” insurance providers, meaning MI companies only sell mortgage insurance and not car insurance, health coverage, etc.

The value of mortgage insurance can be understood in several ways.

First, they allow individuals to purchase homes without waiting to acquire 20 percent down, something that might literally take decades to achieve.


Second, MI companies pay claims when homes are foreclosed — more than $44 billion since 2008.

Third, MI companies have helped many borrowers avoid foreclosure with “claim advance” programs. With a claim advance the MI company prevents a foreclosure by bringing the loan current, buying down the interest rate, or both. The MI company does this because a claim advance is cheaper than a full-blown foreclosure claim.

The National Association of Realtors reports that 60 percent of all first-time buyers purchase with 6 percent down or less. Without FHA, VA and private mortgage insurance these purchases would largely not be made, meaning fewer home sales, less demand and thus lower home values. For this reason both buyers and sellers benefit from the availability of private mortgage insurance.

Private mortgage insurance premiums are typically — but not always — deductible for federal tax purposes

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Syndicated originally to newspapers nationwide by Content That Works. Revised, modified and updated. Posted with permission.

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