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Mortgage Insurance Escape
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Mortgage Insurance Escape
Boulder County home values have had an exhilirating three-year run.
Many people, shortly after congratulating themselves on their prescience, business judgment, good taste, and negotiating rigor, remember that they were forced to pay protection money to their lender because they had a small down payment to start out with.
Now, since they have joined the well-rewarded real estate aristocracy, having 20-40% home equity above loan balance, why should they have to continue to pay the shakedown money?
They don't have to, at least not for long.
Mortgage insurance pays lenders back for their underwriting mistakes. A "mistake" is making a loan which ends in foreclosure. Mistakes are more common and more expensive for the lender when there is less than a twenty percent down payment.
Borrowers who have accumulated such a down payment are a thrifty, reliable lot, and are unlikely even in extremis to walk away from a savings hoard. They will rent rooms, call on family help, sell an equity interest -- do anything to hang on to the place.
No offense intended to those who have not saved as much (they are probably a more interesting crowd, anyway), but when they get in mortgage payment trouble, they have little equity buffer. The foreclosing lender has no buffer, either: months of accrued interest, and foreclosure and resale costs can easily exceed 5-10% down payments.
Though the cost of some systems is well-camouflaged, the ongoing annual mortgage insurance cost for a 90% conventional loan is about .34% per year; on 95% loans it's about .50%.
(FHA note: this mortgage insurance program is incomprehensible to civilians. It is cheap for condos, hideously expensive for all other property types, and big down payments don't help. FHA costs are inescapable, at the start, or ever, except by refinance or payoff.)
Okay. I know why I had to pay. How do I stop paying?
As you plot your escape, remember that the deck is stacked against you. In the package of loan closing documents that you so carefully saved there is not one paragraph describing the length of time you must pay mortgage insurance. There is not a syllable granting mortgage insurance "rights" to the borrower.
You are paying to protect the lender, and lenders won't let you stop unless you make them.
Your ability to escape is based on the loan servicing regulations of Fannie Mae and Freddie Mac. They are subject to change, and interpretation, but they are in writing and in effect at all loan servicers. (A "servicer" owns the right to collect your monthly payment, send you a coupon book, and stupid, threatening mail, and collect a fat, annual fee from whomever really owns your loan -- usually a Wall Street outfit.)
Escape Number One. Wait eight or eleven years, respectively, for your 90% or 95% loan to amortize to 80% of original sales price. Or, same general idea: save like a maniac and send all the money to the lender to reach the same 80% state of grace. These options are not so hot.
Escape Number Two. If your home has appreciated a lot, refinance. This route is little better than the first escape: interest rates may be higher than the one you have, and the refi will cost over a grand, if you can find someone who has time to charge you.
Escape Number Three involves proving to your loan servicer that your property has appreciated, and that they have to take time to help you.
Get ready for an hour lost in phone tree voice mail hell, at the end of which waits a human being who always sounds like Lilly Tomlin as The Telephone Company.
When you ask to drop your mortgage insurance, the first voice will respond: "No, we never do thatÉ." The second: "It is not the policy of MegaBankÉ." Just keep on asking for supervisors.
After introducing your request, your next question should be: "Is my loan governed by Fannie Mae or Freddie Mac?" Fannie and Freddie have slightly different rules, and you need to know what deal you can cut before you try.
If it's Fannie (most), it's easier. The Fannie rules (Section 202.2) use the word "must" in instructing the servicer to drop mortgage insurance when two key requirements have been met: the last 12 consecutive payments were never more than 30 days late, and a new appraisal shows the loan balance to be less than 80% of current property value. Ask your servicer what constitutes an acceptable appraisal.
Alert borrowers will have noticed that if you must have made 12 payments on time, you can't get out of mortgage insurance in the first year -- even if your house appreciated a thousand percent in the first two months (Mapleton Hill only). Lenders are suspicious of sudden spikes in value.
Freddie is tougher, but is the governing agency for loans that were often hard to get in the first place. Freddie wants two years of payments, and proof of 75% loan-to-value. Or wait five years and prove 80%. (Freddie will waive time limits if your increase in home value comes from improvements, as opposed to appreciation magic.)
If you run into a really hardheaded servicer, and need the cavalry, Fannie and Freddie's home numbers are in Washington, D.C. Or, call for help from the local outfit that made the original loan.
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