Try to get rid of that mortgage insurance

Deseret News (Salt Lake City), Jul 31, 2005 by Tara Siegel Bernard Dow Jones Newswires

NEW YORK -- If you're tired of making monthly payments toward private mortgage insurance, you may have an out.

While these payments are irksome for many borrowers -- they aren't tax-deductible -- they do help people buy homes they couldn't otherwise afford by allowing them to put less money down up-front. Indeed, lenders have traditionally required borrowers to pay mortgage insurance if they borrow more than 80 percent of the home's price to protect against default.

However, house prices have kept rising in many parts of the country. The median U.S. home price has risen 25 percent over the past four years; prices in some urban areas have gained even more. So now's the best time to evaluate whether that appreciation might present an opportunity to cancel your policy.

Borrowers can ask to have their private mortgage insurance canceled once they effectively own 20 percent of the house.

"Through a combination of paying (off your mortgage) and home price appreciation, you might be able to cancel the insurance within as little as two years," says Keith Gumbinger, a vice president at HSH Associates, financial publishers in Pompton Plains, N.J.

Many consumers -- notably first-time homebuyers in today's hot real-estate markets -- simply can't manage to come up with the traditional down payment of 20 percent. In fact, the median down payment for a first-time homebuyer is 3 percent, according to a survey conducted by the National Association of Realtors.

The insurance can be quite expensive. For instance, putting $30,000 down on a $350,000 home (at a fixed rate for a term of more than 25 years) translates into a loan-to-value ratio of 91.43 percent. This would require a monthly private mortgage insurance payment of $208, according to the PMI Calculator on HSH's Web site.

There are a few factors that need to be considered before ordering up a home appraisal for $350 or so.

Greg McBride, a senior financial analyst at Bankrate.com, notes that lenders often require you to keep the insurance for a certain period, typically between one and five years.

"It's important to involve the lender in this process so that borrowers don't pay for an appraisal unnecessarily," McBride says.

Naturally, borrowers must have a respectable payment history in order to qualify for a cancellation, nor can there be a second mortgage out on the home.

There are very few loans that require insurance for the entire loan term, but there are some exceptions, according to the Mortgage Insurance Companies of America, a mortgage insurance industry trade group. Some loans, such as certain low-down-payment loans through Fannie Mae, Freddie Mac and the Veterans Administration, are exempt from cancellation laws, according to MICA. And "lender paid" mortgage insurance, or when the insurance is paid by your lender, translating into a slightly higher interest rate on the loan, can't be canceled during the loan's lifetime.

Meanwhile, the Homeowners Protection Act of 1998 requires servicers to automatically terminate coverage on most loans originated after July 29, 1999, when the loan is paid down to 78 percent of the house's original value, MICA says on its Web site. MICA also has a calculator that estimates how long it will take to get your PMI automatically canceled.

Getting to that point can take quite a while -- often a decade or more -- which is why borrowers should factor in any home appreciation, as well as equity built up in their home, and see if they are eligible sooner rather than later.