Mortgage Insurance

QuestionDear Dollar Stretcher,

My husband and I bought a house 18 months ago. We went in with less than 20% down, and so are stuck paying mortgage insurance to the tune of over $80 per month.

What exactly is mortgage insurance for, and is it possible for us to “cancel” our mortgage insurance by showing a good history of paying on time??

We have never been late nor missed a mortgage payment, we make more money now than we did when we bought the house (proof that we are able to pay), and we have excellent credit rating.

It seems to me that we’ve proven ourselves and shouldn’t have to pay for this insurance anymore.

What steps would I take to investigate further with my bank?

Boise, Idaho

AnswerDiane is one of about 1.5 million homeowners who needed Private Mortgage Insurance (PMI) to get a mortgage last year. About 10% of those who have mortgages have PMI.

And for many home buyers, it’s a good thing that PMI exists. In recent years personal income has not kept pace with increases in home prices. And it’s been more difficult for young families to save a sizeable down payment.

Having PMI makes the lenders more willing to give mortgages to people who haven’t saved a 20% down payment.

What makes 20% the magic number? Mortgage companies have found that those with less than 20% equity are more likely to default on the mortgage.

So the good news is that PMI allows you to get into a house sooner. The bad news is that PMI can be expensive.

For instance, if you’re only putting 5% down, your PMI could amount to 0.7% of the money you borrow. On a $100,000 mortgage that works out to $58 per month or $700 a year.

The purpose of PMI is to pay the mortgage company if you default on your mortgage. There are only eight companies that issue PMI. Unfortunately, you don’t get to shop around to find the lowest rate. The mortgage company gets to choose who gets your business.

Over time your home equity should increase. Perhaps you’ve paid the mortgage for a number of years. Or maybe home values in your neighborhood have increased. In either case, your equity has risen to more than 20% of the home’s value. If you’ve made your mortgage payments on a timely basis, you should be able to drop the PMI.

But, many homeowners didn’t know that. Until recently, no one was required to notify you when PMI was no longer needed. Some mortgage companies will require that you keep PMI regardless of your equity for a number of years.

One such company is Federal Home Loan Mortgage Corp (Freddie Mac). They buy up many mortgages and typically require that you keep PMI for at least five years.

Let’s get to the heart of Diane’s question.

Can she cancel her PMI? The answer will depend on her mortgage company and the mortgage agreement. The fact that they’ve never been late and make more money now will be helpful. But much will depend on the equity that Diane has in the home. And she doesn’t mention how much of their home they actually own. But even if her equity is less than 20%, it can’t hurt to ask.

The best way to do that is to contact the bank or mortgage company and ask who is responsible for requiring PMI. Get their name and job title. Write that person a letter stating your case. Stick to the facts. Remember, the loan officer isn’t supposed to be swayed by sentiment or your desire for savings. Their job is to make sure that the bank protected if you default. So provide facts that will demonstrate that you’re a good risk.

A new law doesn’t directly affect homeowners like Diane, but could still be helpful.

The Private Mortgage Insurance Act takes effect July 29, 1999. The new law gives home buyers a number of rights. First, you must be given a written statement explaining that you have PMI and when you’ll be allowed to cancel it.

The law also states that the lender must allow you to cancel PMI when your equity is 22% or more. And you can ask for permission once you’ve reached the 20% equity level. Of course, in reality, the form will be one of the dozens that you receive at closing and many people still won’t realize that they can cancel PMI in a few years.

The law also only affects new mortgages. But, if you’re like Diane and have a mortgage written before the law takes effect, you may still benefit.

Both Freddie Mac and Fannie Mae (who hold over 1/3 of all mortgages) will be applying the new rules to old mortgages. FHA loans are an exception to the new law. Check with your lender, but you can expect to continue to pay PMI if you have an FHA loan.

A final tip for Diane. When she does get to cancel the PMI she might want to take that $80 each month and apply it to prepaying her mortgage. She’s used to getting along without the money, so it’s like getting a free savings plan. This strategy could help her pay off a 30 year mortgage in 15 years!  Not bad for money that she’ll never even miss.

Gary Foreman is the publisher of The Dollar

1 thought on “Mortgage Insurance”

  1. How do I handle this situation with my mortgage company? I lost my job and I contacte dmy bank and gave a payment plan for $851.76/month for 3 months. After that, I still could not find a job. They asked to pay $989/month for another 3 months. I was not able to obtain employment at the end of 3 months. I called the bank and the aksed to submit my financial (my wife’s pay stubbs), which I did. Now they send me a letter saying they are going to foreclosed on me by 4/18/2012.

    When I filed a compliant with FTC, they assigned another specialist because I complianed that I could never reach the previous specialist assgined. My wife had been the one making this payments even though her name was not on the original mortgage papers. The payments I was making before I lost my job was $1437/month, I could not collect unemployment because of the circustances which resulted to lossing my job.
    They asked me to be paying $1298/month just because my wife worked one week of overtime that period.
    I told them I couldn’t because I was struggling to make the $851.76 and $989/month. I have a 17 year old and a college graduate at home to feed without a job. I also told them to reduce the principle to $162000 bases on the home values in my area. That would made the at least $989/monthly affordable to me. They refused and sold the house to their friends for $99000. This is because they can be made whole by the mortgage insurance primium which gruarrantied to them. If I had no morgtage insurance do you think the bank will refuse my offer to lower the principle so I can afford to make the payments and stay in this house? That would be penny wise pound foolish to sell this house for $99000. My question to you is what is my remendy? The bank will not tell me who the Mortgage INSURANCE IS. Wells Fargo, it is.

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