A new report by the Consumer Financial Protection Bureau (CFPB) finds that many consumers are unknowingly paying for insurance that they may not need. The report looked at a sample of 100,000 closed-end loans and found that lenders heaped insurance plans onto unwitting borrowers in 43 percent of cases.
The most common type of insurance was private mortgage insurance (PMI), which is insurance that protects the lender if the borrower defaults on the loan. PMI is typically required when the borrower has a down payment of less than 20 percent. In the CFPB’s sample, PMI was added to the loan in more than one-third of cases.
The second most common type of insurance was credit life insurance, which pays off the loan if the borrower dies. This type of insurance was added to the loan in 10 percent of cases.
Other types of insurance that were added to loans included disability insurance, Property Assessed Clean Energy (PACE) insurance, and forced-placed insurance.
The CFPB’s report found that many consumers are not aware that these insurance products are being added to their loans. In fact, in the CFPB’s sample, 71 percent of borrowers said that they were not aware that insurance had been added to their loan.
The CFPB is concerned that many consumers are being needlessly burdened by these insurance products. In some cases, the insurance products may be duplicative or unnecessary. In other cases, the insurance products may be overpriced.
The CFPB is urging consumers to shop around for loans and to understand the terms of the loan before signing on the dotted line. Consumers should also be aware that they may be able to cancel some of these insurance products after the loan has been originated.
Lender heaped insurance plans onto unwitting borrowers
Many people have experienced the following scenario: You’re in the process of refinancing your home and you’re told by your lender that you need to purchase private mortgage insurance (PMI) in order to qualify for the loan. You’re a bit reluctan
You may not know it, but if you have private mortgage insurance (PMI), you may be paying for more coverage than you need. In some cases, borrowers are paying for insurance that they don’t even know they have.
It’s called force-placed insurance, and it happens when your lender purchase insurance on your behalf without your knowledge or consent. This insurance is supposed to protect the lender if you default on your loan, but it can end up costing you a lot of money.
Here’s how it works: Let’s say you have a mortgage for $200,000 with a 10 percent down payment. That means you have $180,000 left to finance. To protect itself, your lender requires you to have PMI if your loan-to-value ratio is more than 80 percent.
So, if the value of your home drops and your loan balance remains the same, you could find yourself in a situation where you’re paying for PMI even though you no longer need it.
Some lenders will automatically cancel your PMI when your loan balance reaches 78 percent of the home’s value. But others will not. And, even if your lender does cancel your PMI, it may not happen right away.
In the meantime, you could be paying for insurance that you don’t actually need.
When you’re shopping for a mortgage, be sure to ask about the lender’s PMI cancellation policy. You may also want to consider taking out a mortgage that doesn’t require PMI in the first place.
There are a few ways to do this, including making a larger down payment, taking out a piggyback loan or getting a VA loan.