Originally Posted by MediaArtist
Mortgage insurance is simply a fee associated with higher risk loans. PMI isn't anything new.
As to why buyers do it, why do people take out credit cards when the offered rate in 20%? It's because they have compromised credit.
Lending institutions allow you to take out a loan for more than an 80% LTV, but you have to pay a fee. People do it because they don't have 20% down, they have bad credit, or other factors that make getting a traditionally financed loan difficult.
The only thing is, moral hazard has increased so much in the housing market that PMI does nothing to prevent a home debtor from simply walking away from the home, and dumping the debt onto the lender. Usually the amount of mortgage insurance collected is FAR below the remaining balance of the loan in case of default. Hence, FHA is insolvent, and going to get a tax payer subsidized bailout footed by you, me, and anyone else who makes enough to actually pay taxes.
I can see the attraction from buying a property with only 3.5% down...but I don't personally see the justification for the PMI.
Just rent or find something cheaper....but finding something cheaper isn't the American way, right?
Thanks for the clarifications.