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January 22, 2001
"I was told that under Federal
legislation passed in 1999, private mortgage insurance is cancelled
automatically at some point -- borrowers don�t have to do anything. Is that
right."
Yes. Under one provision of that law,
lenders are required to cancel private mortgage insurance on most home mortgage
loans made after July 29, 1999. Cancellation will occur automatically when
amortization has reduced the loan balance to 78% of the value of the property at
the time the loan was made.
But under another provision of this law,
lenders must terminate insurance at the borrower�s request when the
loan balance hits 80% of the original value. Borrowers who take the initiative
can thus terminate earlier than those who wait.
Even under this provision, the wait can
be a long one. With normal amortization, it takes 142 months for the loan
balance on a 8% 30-year loan equal to 95% of property value, to fall to 80%. A
15-year loan that is otherwise identical will get there in 47 months.
However, borrowers who add to their
regular monthly payment will reach the 80% target more quickly. If they add 1/12
of the payment every month -- for example, a $600 payment is raised to $650 --
the mortgages cited above will hit the 80% target in 91 months and 38 months,
respectively.
Warning:
The lender need not accept your request for cancellation if:
*You have a second mortgage.
*The property has declined in value.
*You had a payment late by 30 days or
more within the year preceding the cancellation date, or late by 60 days or
more in the year before that.
If your loan was made before July 29,
1999, you are not covered by this law. If it was sold to Fannie Mae or Freddie
Mac, however, you are subject to the cancellation rules of the agencies
regardless of when the loan was made. And these rules are more favorable to
homeowners because they are based on the current appraised value of the property
rather than the value at the time the loan was made.
Under these rules:
* You can terminate after two years if
the loan balance is no more than 75% of current appraised value, and after 5
years if it is no more than 80%.
*You must request cancellation, and
obtain an appraisal acceptable to the agencies and to the lender.
*The ratios required for termination
are lower if there is a second mortgage, if the property is held for
investment rather than occupancy, or if the property is other than
single-family.
*The agencies will not accept
termination if your payment has been 30-days late within the prior year, or
60-days late in the year before that.
Using current value rather than original
value can substantially shorten the period to termination. For example, the
30-year 8% loan that takes 142 months to reach 80% of original value, will get
there in 96 months with just 1% annual appreciation, and in 53 months with 3%
appreciation.
If your loan was made before July 29,
1999, and if it is not held by Fannie or Freddie, the termination rules that
apply are those of your lender. In some states (California, Connecticut,
Maryland, Minnesota, Missouri, New York, North Carolina, Oregon, Texas and
Virginia), lenders� rules may be affected by state law.
The best strategy is to assume you are
subject to the liberal Fannie/Freddie rules. After 2 years, begin periodically
to estimate the current value of your house. Web sites offering tools that
can help include Homegain.com, Dataquick.com, Propertyview.com and Domania.com.
Simple explanations of how these sites work can be found in Randy Johnson�s
excellent book, "How to Find a Home and Get a Mortgage on the
Internet." Then you can use my calculator 4a, How
Long Before Mortgage Insurance Terminates.
When it appears that you might meet the
agencies� requirements, contact your lender and ask whether your mortgage is
held by one of the agencies. If it is, confirm the ratio of balance to current
value that permits termination in your case, and ask about acceptable
appraisers.
If your loan isn�t held by one of the
agencies, ask the lender for a written statement of its own termination policy.
If your loan was made after July 29, 1999, follow the more liberal of the lender�s
rules or the Federal law. If your loan was made before July 29, 1999, you are
stuck with the lender�s rules.
But don�t accept rules substantially
less liberal than those of Fannie/Freddie without protest. Let the lender know
that so long as you are forced to pay for insurance that Fannie Mae and Freddie
Mac say isn't necessary, the lender need not try to cross-sell you anything
else.
Copyright Jack Guttentag 2002
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