Refinance your way out of mortgage insurance
Mortgage rates are low and home values are appreciating rapidly
in much of the country -- a combination that can help homeowners
get rid of mortgage insurance.
If you got a conventional home loan and made a down payment of
less than 20 percent of the purchase price, you almost certainly
had to pay for private mortgage insurance, or PMI. The policy reimburses
your lender if you default on the mortgage.
"If you fall over a penny over 80 percent, you've got to do
something about the PMI issue," says Richard Brooks, general
partner for First Southeast Mortgage in Birmingham, Ala.
Although the lender is the beneficiary of the policy, you pay for
it. For someone who borrows $150,000 for a $180,000 house (a down
payment of almost 17 percent), mortgage insurance adds about $40
to the monthly payment. The monthly cost varies, depending on the
size of the mortgage and the percentage of the down payment.
You can request that the lender stop charging for mortgage insurance
after you have paid enough to have 20 percent equity in your house,
based on the home's value on the day you closed the loan. It can
take a long time to achieve a 20 percent ownership stake: more than
eight years if you make a 10 percent down payment and pay the minimum
amount every month on a 30-year mortgage.
Another way to get rid of mortgage insurance is to ask to have
your house appraised again. If the value has increased sufficiently,
your current mortgage balance might be less than 80 percent of the
home's new value. In other words, the amount you owe hasn't changed,
but it's a lower percentage of the home's value because the value
has risen.
The problem with getting your house reappraised to get rid of PMI
is that it doesn't work during the first two years of the loan.
Once you have to pay for mortgage insurance, you're stuck with it
for two to five years, regardless of how rapidly the home's value
appreciates. That's the policy of Fannie Mae and Freddie Mac, the
two biggest purchasers of home loans.
Why? Because people who make down payments of less than 20 percent
are riskier borrowers, regardless of how fast home values appreciate.
So Fannie and Freddie require those homeowners to pay PMI for at
least two years. Those who make late mortgage payments can be stuck
paying for mortgage insurance for up to five years.
This is where refinancing comes in. It can be another tool to get
rid of mortgage insurance.
When you refinance your mortgage, the lender obtains an appraisal.
If the value has risen enough, your new loan might account for less
than 80 percent of the home's current value -- and you won't have
to pay for mortgage insurance.
Article continued at http://www.bankrate.com/brm/news/mortgages/20030305a1.asp?prodtype=mtg
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