Ways to avoid the cost of mortgage insurance

STARTING OUT

November 27, 1994|By Dian Hymer

How can I avoid mortgage insurance?

Mortgage insurance -- also known as MI -- is required by most conventional lenders when the borrower makes a cash down payment of less than 20 percent of the purchase price.

MI protects the lender in the event that the borrower stops making payments on the loan. MI is usually paid for by the borrower. A separate approval process is required to get a borrower approved for MI.

The cost of MI varies depending on the MI company, the amount of the cash down payment and the type of the loan. MI for an adjustable-rate mortgage will cost more than it will for a fixed-rate loan. The more cash you put down, the lower will be the cost of the MI premium. Usually lenders require that the borrower pay the entire first year's MI premium in advance at closing, which can add significantly to your closing costs.

There are several ways to avoid MI. One is to ask the seller to carry back a second mortgage. Lenders vary on how much they require a seller to carry in order for you to avoid MI. Some won't require MI if you put 10 percent down and the sellers carry a second loan for 10 percent of the purchase price.

Other lenders (most Freddie Mac and Fannie Mae lenders) require that the seller carry a 15 percent second if the borrower puts 10 percent down (or the seller can carry a 10 percent second if the borrower puts 15 percent down).

If a seller carry back is not possible, you may be able to find a lender who'll loan you a second mortgage, but don't expect to find a competitive interest rate on such a loan. Another option is to have your parents give you money to apply toward your down payment. Or your employer, or a relative, may be willing to make you a loan (either a loan that's secured against the property or an unsecured, personal loan).

Many portfolio lenders don't require MI when the borrower puts less than 20 percent down. These lenders self-insure for MI. Their loans usually have a higher interest rate than you'll find on a loan that requires separate MI.

There are pros and cons to loans with MI built into the interest rate. On the positive side, a separate MI approval process is not required, which saves time and eliminates the risk of being turned done by the MI underwriter. And since the cost of MI is built into the interest rate, it's tax deductible. But when the cost of MI is built into the interest rate, there's no possibility for canceling MI in the future.

FIRST-TIME TIP: Most lenders will allow you to cancel MI under certain conditions. Some lenders require the borrower to have paid on the loan for two to five years before they'll agree to cancel MI.

Others have no time requirement, but they require that the loan-to-value ratio -- or LTV -- be 80 percent or less.

In this case, an appraisal is required to substantiate the current value of the property. Lenders also require a good mortgage payment history (that is, no late payments) before they'll agree to drop MI. Find out before you close your home purchase what the lender will require in order for you to cancel MI.

THE CLOSING: When you think you meet those conditions, contact the loan servicing department and find out how to make a formal request to drop MI. Don't contact the MI company. The decision to cancel MI is made by the lender.

Dian Hymer's column is syndicated through Inman News Features. Send questions and comments care of Inman News Features, 5335 College Avenue, No. 25, Oakland, Calif., 94618.

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