CAN YOU get rid of your mortgage insurance, and quit paying premiums every month? Probably so, if it's private insurance and you have enough equity in your home. But generally not, if you're insured by the Federal Housing Administration.
Anyone with a conventional loan (not backed by the FHA or VA) would normally have purchased mortgage insurance, if the downpayment came to less than 20 percent. This form of insurance protects the lender. If the lender has to foreclose, and your house doesn't sell for enough to cover the outstanding loan, mortgage insurance makes up part or all of the difference.
You need enough coverage to pay off a certain percentage of the loan. Recently, that amount went up for buyers with downpayments under 15 percent.
Under the new rules, if you buy a house with less than 10 percent down, you need enough mortgage insurance to cover 30 percent of the loan amount. With a downpayment of up to 15 percent, your mortgage insurance has to cover 25 percent of the loan. With downpayments of 15 percent and up, you still buy 12 percent coverage.
Not everyone can get private mortgage insurance. It's reserved for creditworthy people in areas where home prices are stable or rising. Sample prices from the Mortgage Guarantee Insurance Co.: With 5 percent down on a $100,000 mortgage, you pay $61.75 a month the first year and less in later years, as the mortgage balance declines. With 10 percent down, you pay $39 a month in the first year.
Lenders have different rules on when they let you drop mortgage insurance -- all of which should be disclosed at the time you buy. The rules stay the same, even if your lender sells your mortgage to someone else.
At Countrywide Funding Corp. based in Pasadena, Calif., you can cancel your insurance if you pass all of the following tests: your loan is at least two years old; you have a good payment record; and you have at least 20 percent equity in your home. (Your "equity" is the difference between the current mortgage amount and what the house would probably sell for.)
If you want to drop mortgage insurance as part of a refinancing, you generally need 25 percent equity.
You have to tell whoever is servicing your loan that you want to drop the mortgage insurance (the servicer is the person who collects your mortgage payments). And you have to pay for an appraisal. If the value of your property has declined, you may not be able to drop your insurance even if your equity is 20 percent.
Some lenders offer to pay your mortgage insurance premiums for you, if you'll accept a slightly higher mortgage interest rate. At the start, this offer looks pretty good. Your monthly payment is about the same and you get a higher interest deduction. The appeal fades, however, if you plan to live in the home for many years. You're stuck with that higher mortgage rate, even after the time when you might have canceled the mortgage insurance.
With an FHA mortgage, you get government-backed insurance, which in this case covers 100 percent of the loan. You pay 2.25 percent upfront, which works out to slightly more than the price of private insurance. On a $95,000 loan, you'd pay $2,137 upfront. If you don't have the cash, you can finance that payment by adding it to your mortgage loan. Your annual insurance premiums come to 0.5 percent of the average loan balance, paid monthly.
With a downpayment of 5 percent to 10 percent, you'd owe FHA mortgage insurance premiums for the first 12 years. After that, they stop. If you put down more than 10 percent, you'd pay premiums for only seven years. But if you bought on a shoestring, paying less than 5 percent of the price out of pocket, you'd have to pay premiums for the life of the loan (usually 30 years).
As a practical matter, FHA insurance premiums can't be canceled early, an official of the U.S. Department of Housing and Urban Development told my associate, Amy Eskind. But if you put down 5 percent or more, your premiums get canceled automatically after seven or 12 years.