Cancel your PMIGet a refund from FHA

If you now or in the future pay mortgage insurance premiums (PMI, MIP/FHA), you're wasting money that could otherwise slice your principal balance and build your equity. You want to eliminate this expense as soon as possible.

Although the rules for canceling PMI whip through some twists and turns that can confuse, these basics should put you on the right track.

Cancel Your PMI

For conventional loans (non-FHA) closed after July 29, 1999, upon your request lenders must cancel your PMI premium payments once your outstanding mortgage balance drops to 80 percent of your home's original purchase price. Should you fail to ask, the lender must automatically cancel when your outstanding mortgage balance falls to 78 percent of your original purchase price; however, on a 30-year loan your paydown to 78 to 80 percent won't occur for more than 11 years. You need to look elsewhere for faster relief.

The Market Value Test

When your loan has been sold to Fannie Mae or Freddie Mac, you get a break. Fannie and Freddie apply a market value test:

  • Two-year mark: Once your loan passes the two-year mark, you may cancel PMI anytime as long as your loan balance totals no more than 75 percent of the current market value of the property.
  • Five-year mark: Once your loan passes the five-year mark, you may cancel anytime as long as your loan balance does not exceed 80 percent of the property's current market value.
  • Appraisal required: To cancel PMI under either of these options, provide a competently prepared market value appraisal to Fannie or Freddie as well as the originating lender.
  • Credit: Excellent payment on your mortgage. No 30-day lates within the most recent 12 months. No 60-day lates within the past 24 months; however, the lender will not pull your credit report or credit score.
  • Second mortgage: If you owe on a home equity loan, lenders apply stricter review standards for your credit and LTV.
  • Rental property: Stricter review and lower LTV ratios also apply to nonowner-occupied properties, even if the property previously served as your home.

Given the fact that PMI premiums can cost anywhere from $75 to $200 a month or more, plan to terminate this coverage as soon as possible. Here are three ideas:

  1. Improvements: You need not wait for market appreciation to boost the value of your property. Improve it. Borrow, say, $7,500 to $10,000 to create value; then pay off the loan with the money saved by canceling the PMI premiums.
  2. Prepayment: If you lack ready cash, borrow money to pay down the mortgage balance. Execute an 80-10-10 plan retroactively.7 Pay off the loan with your mortgage interest and PMI savings.
  3. Refinance: On occasion, you might find it profitable to refi out of your mortgage insurance. Tom Warne, president of Majestic Mortgage, recently told how one of his customers refinanced at the same interest rate, yet by dropping his $168 per month PMI premium he still managed to save money.

7 Beware, though of teaser ARMs or other deceptive gimmicks lenders use to lure unsophisticated borrowers into unwise home equity loans. At least PMI premiums will not increase as might an ARM or some type of deferred interest, negative amortization product.

If you could get stuck paying PMI for four or five more years, figure a way to meet the cancellation rules. PMI costs you real money. Yet after you close your loan, you gain no benefit from PMI that justifies its cost. Execute a plan to end it.

Portfolio Lenders

If a lender holds your loan in its portfolio, you're at the mercy of that lender. You can wait out the time necessary to drop your loan balance to 80 percent of your original purchase price, prepay as you gain extra cash, or accept whatever cancellation rules the lender makes.

When you apply for a mortgage (if your loan requires mortgage insurance), ask whether the lender will sell the loan to some firm other than Fannie or Freddie. Will the lender keep the loan in its own portfolio? Pin down what hoops you must jump through to remove the PMI as quickly as possible.

FHA Benefits: Cancellations and Refunds

FHA has cut its closing cost MI premium from 2.5 percent to 1.5 percent. For loans originated after January 1, 2001, FHA will automatically terminate the monthly MIP when the loan balance drops to 78 percent of the property's purchase price. Not as good as the rules of Freddie or Fannie, but still an improvement—and FHA promises more cuts if borrower defaults and foreclosures don't push its insurance fund into the red, as happened during the 1980s.

Borrowers who pay off their FHA loans through sale or refinancing also receive a bonus from FHA of $700 on average. Unlike PMI companies, FHA shares its mortgage insurance fund surpluses (if such surpluses accrue) with borrowers whose long-term payment record prior to payoff shows no serious delinquencies.

SECRET # 104

0 0

Post a comment