Getting rid of mortgage insurance

April 16, 1995|By Jane Bryant Quinn | Jane Bryant Quinn,Washington Post Writers Group

Can you get rid of your mortgage insurance, and quit paying premiums every month? Probably so, if it's private insurance and you have enough equity in your home. But generally not, if you're insured by the Federal Housing Administration.

Anyone with a conventional loan (not backed by the FHA or VA) would normally have purchased mortgage insurance if the down payment came to less than 20 percent. This insurance protects the lender. If the lender has to foreclose, and your house doesn't sell for enough to cover the outstanding loan, mortgage insurance makes up part or all of the difference.

You need enough coverage to pay off a certain percentage of the loan. Recently, that amount went up for down payments under 15 percent.

Under the new rules, if you buy a house with less than 10 percent down, you need enough mortgage insurance to cover 30 percent of the loan amount. With a down payment of up to 15 percent, your mortgage insurance has to cover 25 percent of the loan. With down payments of 15 percent and up, you still buy 12 percent coverage.

Not everyone can get private mortgage insurance. It's reserved for creditworthy people in areas where home prices are stable or rising. Sample prices from the Mortgage Guarantee Insurance Co.: With 5 percent down on a $100,000 mortgage, you pay $61.75 a month the first year and less in later years, as the mortgage balance declines. With 10 percent down, you pay $39 a month in the first year.

Lenders have different rules on when they let you drop mortgage insurance -- all of which should be disclosed at the time you buy. The rules stay the same, even if your lender sells your mortgage to someone else.

At Countrywide Funding Corp. based in Pasadena, Calif., you can cancel your insurance if you pass all of the following tests: your loan is at least two years old; you have a good payment record; and you have at least 20 percent equity in your home. (Your "equity" is the difference between the current mortgage amount and what the house would probably sell for.) If you want to drop mortgage insurance as part of a refinancing, you generally need 25 percent equity. You have to tell whoever is servicing your loan that you want to drop the mortgage insurance. And you have to pay for an appraisal. If the value of your property has declined, you may not be able to drop your insurance.

Some lenders offer to pay your mortgage insurance premiums for you, if you'll accept a slightly higher mortgage interest rate. At the start, this offer looks pretty good. Your monthly payment is about the same and you get a higher interest deduction. The appeal fades, however, if you plan to live in the home for many years. You're stuck with that higher mortgage rate, even after the time when you might have canceled the mortgage insurance.

As a practical matter, FHA insurance premiums can't be canceled early, an official of the Department of Housing and Urban Development told my associate, Amy Eskind. But if you put down 5 percent or more, your premiums get canceled automatically after seven or 12 years.

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