There are 2 types of coverage. Level and decreasing. Level covers you for the starting principle loan amount, and stays at that level of protection. The cheaper, decreasing, covers the principle balance of the loan. Most likely you are being offered decreasing on a mortgage. Here, in MS, loan coverage is up to $100,000. If you owe $200,000, then you're still left with $100,000 you owe. It doesn't necessarily pay it off. This will likely be different in different states--if it is even legal to be offered. Also, what you're doing is paying a lump sum of the policy. You aren't paying monthly, like car insurance or life insurance. You are financing in $4000 on top of your mortagage loan amount. That means that $4000 @ 6% over the term of your loan ***although the coverage ends in 5 years***. At the end of the 5 years you may be offered monthly installments to keep the coverage, but that is a different kind of policy they are switching you to--it ain't cheap either. You're still paying for the initial policy, since it was financed in for the 30, 20 or 15 years you financed your house on. To further show this:
$4000 (that's being generous, it's based on age)
at 6%
financed for 30 years
= $23.98/mo
23.98 x 360 (30 yrs) = $8632.80 you paid for 5 yrs coverage of $100,000.
Go get a real life insurance policy of some sort, whole, term whatever. It'll be real coverage not something that will expire uselessly. That $4000 is generous and for a younger borrower. If you are at the age where it is really a factor that you may be worried about dying, the rate is much higher. Plus, there are conditions about health, suicide etc.
If they are offering this to you at the closing table, that is a big sign that it's a scam. More likely you're thinking about the attorney offering you your own title insurance policy, in addition to the title insurance you bought for the lender. That's different, but I wouldn't get that one either. Not a big scam like this stuff though.
