Why Pay for Unneeded Insurance?

How do homeowners required by their lenders to have mortgage insurance know when they no longer need such coverage? Lenders certainly aren’t volunteering the information. So the House and Senate are each considering legislation that would force disclosure by lenders on when and how borrowers may cancel their mortgage insurance. This consumer protection is long overdue.

The requirement would put to an end a widespread and notorious mortgage industry practice. Lenders require home buyers who put down less than 20% of the purchase price to buy private mortgage insurance. The coverage protects lenders, or whoever ends up owning the loan, should the homeowner default on the mortgage.

But too many homeowners are paying for the insurance well beyond the point at which they have built up a 20% equity in their homes, a level at which they could typically drop the coverage. With premiums ranging from $20 to $100 a month ($240 to $1,200 annually), those extra, unnecessary premiums can cost consumers plenty over time.

Congressional estimates put the number of homeowners in this situation in the tens of thousands nationwide. Few know they can cancel, let alone know how to do it, because lenders or loan servicers fail to provide the information. Some homeowners have had to sue to cancel the insurance. Rep. James V. Hansen (R-Utah) introduced the first bill to address the problem. Sen. Alfonse M. D’Amato (R-N.Y.), head of the Senate Banking Committee, held hearings on the issue last week.

Currently, about 40% to 45% of home loans are required to have private mortgage insurance, compared with 30% a few years ago. It’s hard enough to cover the mortgage on a family home. To pay mortgage insurance beyond the required point only adds to the load. Buyers should be made aware of this fact, and well in advance.