There comes a time when you can dump that mortgage insurance

Staying Ahead

June 17, 1996|By Jane Bryant Quinn

NEW YORK -- When you first bought your house, did you put down less than 20 percent of the sales price? If so, your monthly payment most likely includes a premium for mortgage insurance.

Without insurance, the bank would not have lent you the money, so this coverage is invaluable. Eventually, however, it outlives its usefulness.

But canceling unneeded mortgage insurance is sometimes easier said than done. Your bank may assert that you can't remove the coverage because your loan has been sold to an investor.

But in almost all cases, you can indeed eliminate these policies and save yourself the monthly premium. A bank employee who says "no" may be ill-informed.

Rep. James V. Hansen of Utah is drafting a national disclosure bill modeled on a California law. It would require the lender to tell you, upfront, whether and how your mortgage insurance can be canceled. Some homeowners don't even know that the coverage can be dropped.

Laying any kind of mandate on business, even if it's just disclosure, isn't popular with this Congress. Hansen is a conservative Republican who thinks of his proposal as "consumer protection, not regulation," says his aide, Joshua Johnson.

For the foreseeable future, most Americans will have to figure out mortgage insurance by themselves. To get you started, here are three mortgage players that you need to know: (1) The lender is the bank that originally gave you the loan. (2) The servicer is the company that collects your monthly payments and answers your questions (it's usually a bank, but not necessarily the bank you borrowed from). (3) The investor is the institution that owns your mortgage loan (it could be the original lender, but the lender usually sells the loan to someone else).

Mortgage insurance protects the investor. If you default and the property is sold for less than the value of the loan, the insurance pays the investor most or all of the money back.

Low down-payment loans are the most likely to go into default. The government-run Federal Housing Administration (FHA) insures loans with down payments as low as 3 percent. Private insurers normally want down payments no lower than 5 percent.

The lower your down payment, the more insurance you have to buy. Say you take a 30-year, $120,000 loan, insured by PMI Mortgage Insurance in San Francisco. With 5 percent down, you might pay $78 a month in the first year and lesser amounts in later years, as the loan principal declines. With 10 percent down, you'd start out at $52 a month.

You can normally cancel private insurance once the equity in your home exceeds 20 percent or 25 percent. (Your "equity" is the difference between your current mortgage amount and what the house would probably sell for.) You gain equity in two ways: by having your house increase in value and by making payments on the loan.

The investor decides when insurance can be canceled, not the lender or the servicer. The Federal National Mortgage Association (Fannie Mae), which buys 20 percent of the nation's mortgages, says you need 20 percent equity plus a good payment record for the past 12 months. The Federal Home Loan Mortgage Corp., another investor, says you have to have held the mortgage for at least two years -- and you may have to have improved the home.

If the value of your property has declined, you may be required to keep the coverage even if your equity tops 20 percent.

To find out if you qualify for cancellation, send a written request to your servicer. You should be told who owns the loan and the cancellation terms. You'll generally have to pay to have your home appraised.

The servicer may reply that your coverage can't be canceled. But press the issue. No one interviewed for this column could think of a private mortgage investor who insisted that coverage last forever.

Eliminating the insurance not only reduces your monthly payment, but you'll also recover any prepaid premiums stashed in your escrow account.

FHA mortgages work differently. You pay 2 percent or 2.25 percent of the loan amount upfront, plus 0.25 percent or 0.5 percent a month, depending on the mortgage term. If you don't have the cash, the upfront payment can be financed.

Some investors let you cancel FHA coverage early (Fannie Mae is one), others don't. If you can't cancel early, the insurance ends automatically, usually after seven or 12 years.

Pub Date: 6/17/96

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