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Should I buy mortgage insurance from my bank?


Mortgage insurance is one of the worst financial-service products out there. What makes it especially awful is that homeowners usually have no choice about whether to buy it. If your mortgage covers more than 80 percent of the cost of your home, then your lender is likely to require you to have it. What makes mortgage insurance so bad, other than the compulsion, is that it only provides protection for the bank, not you, if you ever default on your loan.
This is how it works: When you buy a home with less than a 20 percent to 25 percent down payment, the lender makes you take out a policy that typically will cover up to the first 25 percent of the bank’s potential loss in case you default. For example, if you default on a $200,000 mortgage, the insurer will pay the bank $50,000 or however much the bank is out of pocket after foreclosing on you and selling the property, whichever is less.
So your lender probably would come out whole, and you would lose your home after dutifully paying to limit the lender’s risk. As for whether you should buy the policy from the same bank that holds the mortgage, I probably wouldn’t out of sheer stubbornness, but I suppose the correct answer is that you should shop around and take the best of all the bad deals. Better yet, keep saving so that your down payment will be big enough for you not to need mortgage insurance.
-Conrad de Aenlle