Sorting out the mysteries of mortgage insurance

MAILBAG

August 01, 1999

I've received questions concerning the difference between FHA mortgage insurance and private mortgage insurance.

The FHA/HUD mortgage insurance program is a different animal than private mortgage insurance. FHA mortgage insurance protects lenders against loan defaults in mortgages for multiunit family homes and other properties that meet certain minimum requirements.

Homebuyers who make a down payment of less than 20 percent on a conventional loan are required to pay private mortgage insurance, which can range anywhere from $50 to $100 extra per month. Borrowers can request lenders to remove PMI once the property has 20 percent equity.

However, federal legislation that took effect Thursday will require lenders to cancel PMI on new loans when the borrower's payments reduce the mortgage to 78 percent of the original loan.

Most borrowers with FHA mortgages currently pay an upfront mortgage insurance premium (MIP) and an annual (or monthly) MIP as well. The premiums fund the payments made by HUD to lenders when FHA-insured borrowers default on their mortgage loans.

Refunds for FHA-insured mortgage premiums are made only when the FHA-insured loan is terminated. Refunds are based on the number of months the loan is insured. After 84 months, no refund is due the homeowner.

An FHA-insured loan can be terminated by selling the property, except when the mortgage loan is assumed by the purchaser. A homeowner also may terminate an FHA-insured loan by refinancing the property with a "conventional" (non-FHA) mortgage.

For someone who has a large amount of equity in their home and has an excellent credit rating, it is possible to refinance into a conventional loan and avoid mortgage insurance. For homeowners who refinance an FHA-insured loan with another FHA-insured loan (typically to get a lower interest rate), the refund from the old upfront premium may be applied toward the upfront premium required for the new loan.

When an FHA loan is terminated, the mortgage company notifies HUD of the insurance termination. If you are eligible for a refund, HUD will either request the treasury to issue a check directly, or will send an application for a premium refund. You can contact HUD about your FHA-insured loan at 800-697-6967, or try HUD's Web site at www.HUD.gov.

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