Tip of the Month by Steve Richman

by 02 Jun 2008
Borrowers considering financing a house with less than 20 percent down soon learn about mortgage insurance and the other options that make low down payment mortgages possible. But many don?t realize they won?t be locked into mortgage insurance (MI) for the entire term of the loan. MI is usually cancelable once the borrower?s equity in the home reaches 20 percent. It?s one low down payment option that actually saves your customers money in the long term, and can help you close more loans. That?s good news for first-time homebuyers and other borrowers seeking low down payment home financing. Loans secured with mortgage insurance provide the safety and security borrowers want in today?s volatile mortgage market. The past few years have taught today?s buyers to be wary of risky exotic financing tools such as Interest Only, Pay Option ARM and piggyback mortgages. That?s why the idea of a traditional fixed-rate mortgage with MI has become so attractive to so many. MI loans aren?t subject to interest rate resets, and monthly payments decrease when the borrower builds enough equity to cancel the insurance. An analysis by Wharton School of Business Professor Susan M. Wachter earlier this year found that payments on a standard MI loan can drop almost 10 percent over five years. According to Mortgage Insurance Companies of America (MICA), 90 percent of borrowers cancel their mortgage insurance within the first 60 months. As a lending professional, you know that every penny you can save for your customer is a win. Mortgage insurance doesn?t just benefit your customers by getting them an affordable, safe low down payment mortgage. It also provides a great selling point for brokers and loan officers who can promise customers that their monthly mortgage payments will go down when the MI is canceled in the future. MI also provides additional benefits including homeowner assistance programs and job loss protection in times of financial hardship. And the premiums are tax deductible. You might wonder how MI is canceled. It?s automatic on most recent loans, as mandated by The Homeowners Protection Act of 1998. This law requires that MI on the majority of loans originated on or after July 29, 1999 automatically be terminated when the mortgage is scheduled to amortize to 78 percent of the original value of the house as long as the borrower is current on all monthly payments. Borrowers with loans originated on or after July 29, 1999 may also request cancellation even earlier?when the loan is paid down to 80%?if the borrower has a good payment history, can demonstrate the property has not declined in value, and there is no subordinate lien. Lenders must inform homebuyers about this right to request cancellation at closing, and again on an annual basis. For loans originated before July 29, 1999, borrowers may still be able to request cancellation of their MI once 20 percent equity in the home is reached as long as they meet all requirements established by the owner of the loan (i.e., the investor). These requirements may be similar to those for cancellation under the Act, i.e., good payment history, satisfactory evidence that the property value has not declined and no subordinate lien. However, different investors may have other or different requirements. The cancellation process can be broken down into three simple steps: First, a borrower should consider the amount of principal paid on the loan, any home improvements which could increase its value, and area home price appreciation. Then, the borrower should gather the necessary paperwork on the property and mortgage, and call the loan servicing company to discuss any cancellation requirements, which might include a new appraisal and/or more information about the home. Finally, the borrower should send the mortgage servicer a written cancellation request. A number of resources exist on www.privateMI.com to help borrowers through this process, including a Cancellation Calculator, sample appraisal and cancellation letter. You should also familiarize yourself with the process so you can inform your customers of this benefit when recommending loan options. Remember, MI is a critical stepping stone to more Americans becoming homeowners in a responsible way. But it?s just that ? a stepping stone, and often the best solution to get borrowers into a home sooner and more affordably.



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