FHA mortgage loan has different insurance rule

MAILBAG

November 30, 2003

Some readers ask whether there is any way to cancel mortgage insurance on Federal Housing Administration loans.

Mortgage insurance on FHA loans does not automatically cancel even if the loan-to-value ratio has improved substantially. This is different from private mortgage insurance.

With FHA loans, you must pay the monthly mortgage insurance premium as long as you own the home or keep the loan. But in the current real estate market, with rising home values and low mortgage interest rates, folks who are paying government mortgage insurance should investigate refinancing to a conventional loan which does not require mortgage insurance.

FOR THE RECORD - The Nov. 30 Mailbag contained incorrect information regarding Federal Housing Authority loans and how the FHA addresses mortgage insurance.
FHA's Homebuyer Savings Plan reduced the upfront premium requirement on loans closed on or after Jan. 1, 2001.
For these loans, FHA's monthly premium is eliminated when the loan-to-value ratio reaches 78 percent, provided the borrower has paid these premiums for at least five years.
For FHA-insured mortgages with original terms of 15 years and shorter and with original loan-to-value ratios of 90 percent or greater, the monthly mortgage insurance premium will be canceled automatically when the loan-to-value ratio reaches 78 percent, regardless of how long the borrower has paid the premiums.
Mortgages with original terms of 15 years and shorter and with loan-to-value ratios of 89.99 percent and less will not be charged monthly FHA mortgage insurance premiums.
Borrowers with FHA-insured loans closing before Jan. 1, 2001, may receive a refund on upfront premiums paid when they sell their homes or refinance their loans.

If the current value of your home equals 80 percent or more of its appraised value, you should be eligible for conventional financing.

Another alternative is to refinance with a first mortgage for 80 percent of the home's value and a second mortgage for the additional amount needed to pay off the FHA-insured mortgage - plus closing costs.

Often, the combined monthly payments on the first and second mortgage will be lower than the payment (including mortgage insurance) on an FHA loan of the same amount.

FHA-insured loans work best for homebuyers who can make only small down payments.

Once the home value has increased and provides the needed equity for the homeowner, less expensive mortgages may be available. It's a good idea to shop conventional mortgages offered by banks, credit unions and mortgage lenders and brokers.

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