Under this loan, insurance costs don't go away

MAILBAG

January 23, 2005

In 1992 my wife and I bought a condominium. The cost was $110,000 and we financed $106,350.

It is a variable Federal Housing Administration (FHA) loan that adjusts annually with a maximum 1 percent change each year. It's been a really good loan and the current rate is only 3.875 percent, so I really don't want to refinance it.

The lender still charges approximately $35 a month for private mortgage insurance and the current balance is about $70,000. I wrote to the lender about a year ago and was told that because this was a FHA loan, the PMI never goes away, regardless of loan-to-value or purchase ratio.

Please let me know if this is possible or if I should contact the lender again, and what I should tell or ask them?

Mortgage insurance on FHA loans that closed before January 1, 2001, does not cancel, even if the loan-to-value ratio has improved substantially. On pre-2001 loans, borrowers must pay the monthly FHA mortgage insurance premium as long as they own their home or keep the loan.

For loans closing on or after January 1, 2001, FHA's monthly premium is eliminated entirely 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 less 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 the length of time the borrower has paid the premiums.

However, since your loan was closed in 1992, these mortgage insurance cancellation provisions do not apply. Borrowers with FHA insured loans closing before January 1, 2001, may receive a refund of a portion of upfront mortgage insurance when they sell or refinance.

Your $35 monthly mortgage insurance premium now adds about 0.6 percent to your mortgage interest rate. Considering loan closing costs, I agree it's better for you to continue paying $35 a month mortgage insurance than to refinance your mortgage and eliminate the mortgage insurance cost. On the other hand, if you want to take cash out for home improvements, the insurance savings may make a new loan an attractive option.

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