Are you paying for mortgage insurance that you don’t need?
The majority of people buying homes nowadays put down less than the traditional 20 percent of the purchase prices. As a result, many of these homeowners have accepted the fact that they have to commit a part of their monthly mortgage payment-typically $30-$60-to pay for mortgage insurance.
But what happens when you reduce the outstanding balance on your loan to the point that you have 20 percent equity in the property, effectively meeting this 20 percent down requirement? You could be paying for insurance that you no longer need.
First let’s address why homeowners have to pay mortgage insurance in the first place.
In order for a borrower to be considered an acceptable lending risk, a mortgage lender, or an investor if your mortgage loan is to be sold into the secondary market, wants to be guaranteed a substantial amount of equity in the property. The more equity a borrower has, the less likely the chance of default, the thinking goes.
The problem is that a big percentage of the home buying public can’t afford the 20 percent down payment traditionally considered the break point of acceptable risk.
According to the latest Chicago Title & Trust national home buyer survey, first-time buyers bought 47 percent of all houses in 1994, using an average down payment of 13.7 percent.
In lieu of a larger down payment, a mortgage lender can require the borrower to purchase mortgage insurance to reduce the lender’s exposure to the risk of borrower default.
Mortgage insurance can be bought by the borrower for a lump-sum at the closing, but this can amount to thousands of dollars. To help offset this burden, mortgage insurance can be paid on a monthly basis. The borrower usually pays a portion of each monthly mortgage payment for mortgage insurance.
A person buying a $100,000 house with 5 percent down would pay about $54 a month for mortgage insurance, according to GE Credit Mortgage Insurance. The mortgage loan servicer, who sends the monthly statements and collects the mortgage payments, deposits the insurance portion in an escrow account to pay the insurance premiums.
So how do you know when you are at the point in your mortgage loan when you can cancel the mortgage insurance?
Many servicers have adopted a policy of informing their customers when this happens.
But there are a lot of servicers who don’t tell their customers when they become eligible for cancellation, so the burden remains on the borrower to keep track of the equity stake in the property and contact the servicer-not the mortgage insurance company-regarding cancellation.
A 20 percent equity stake-80 percent loan-to-value or LTV-may not be the only requirement that a borrower has to meet in order to have mortgage insurance cancelled.
Sue Bunce of Norwest Mortgage, a large mortgage servicer in Des Moines, says “generally, we look at the payment record along with the LTV to see if the insurance can be canceled. We also have to look at the value of the house. In declining markets, the LTV may not be going down based on current values, so an appraisal is important.”
Geoff Cooper of Mortgage Guarantee Insurance Co. said various mortgage investors have “their own criteria for canceling insurance. If you feel you can cancel your insurance, call the investor. Ask for the criteria.”
Fannie Mae, for example, has two methods for determining whether mortgage insurance can be canceled. One method is based on the original value of a property; the other on the current appraised value.
Servicers may cancel the insurance on a mortgage automatically, or upon request by the borrower, if the principal balance falls below 80 percent of the original value of the property.
If the mortgage has been refinanced, the insurance can’t be canceled unless the borrower has made at least 12 consecutive payments and never been more than 30 days late with payments.
Cancellation of the insurance based on the current appraised value takes an appraisal, paid by the borrower, showing the combination of an increase in the value of the property and payments to the principal which have caused the mortgage balance to fall below 80 percent.
Also, payments for the last 12 months must never have been more than 30 days late.
“At closing, we explain the steps borrowers need to take when they think they can cancel their insurance,” says Norwest’s Bunce. “It’s part of our full-disclosure policy.
“Typically, the investors look to the servicers to see if their criteria are met. Investors tell us when we can cancel. But like other servicers, we won’t cancel the mortgage insurance until asked by a borrower.”
If you have the opportunity to cancel, says Kevin Hawkins of Fannie Mae, “exercise it.”
When the mortgage insurance is canceled, the servicer should reduce the monthly payments by the insurance amount. Any unused premium payments in escrow would either be refunded or applied to principal as the borrower wishes.
However, if the insurance premium was part of the original amount loaned, the servicer can’t reduce payments but must return to the borrower any escrowed amounts.
“Today a mortgage lasts about seven years,” says MGIC’s Goeff Cooper. “The average length of mortgage insurance is only three years. So mortgage insurance is being canceled all the time. Just don’t call the mortgage insurance company, we can’t do anything about it.”
If you’re a homeowner and paying mortgage insurance, check your mortgage statements or call your mortgage servicer to find out if you can have the insurance cancelled.
The money that you save from canceling the insurance can be put to better use, namely, paying off your mortgage.
