July 30, 1999

Insurance changes apply to new loans

By TOM KELLY
The Real Estate Advisor

It's not an easy time to be a real estate appraiser. The new Homeowners Protection Act recently kicked into gear, eliminating the need for private mortgage insurance on loans closed after July 29.

However, it is not the versatile lifesaver it appears to be. The new law applies only to new loans, so borrowers with loans already in place continue to operate under the vague, "voluntary" guidelines of their respective lender or loan servicer.

Under the law, PMI must be terminated when the mortgage's loan-to-value ratio reaches 78 percent of the property's "original" value. Borrowers must be current on all payments before the monthly premiums are dropped.

However, homeowners with existing mortgages don't necessarily face the same "slam dunk" decision. They may request that PMI be dropped when the loan-to-value ratio hits 80 percent, but many folks have refinanced in the past three years and often have reduced their equity stake in the property.

"The borrower with an existing mortgage does not come under the construct of the new law," said Sam Pincich of America's Community Bankers, the organization that helped write the new law. "The new law does not recognize the current voluntary guidelines."

Typically, the current value of the home must be determined by a full-blown appraisal, bringing the professional appraiser under additional pressure from lenders and home buyers to "come in with the right numbers."

Some major mortgage lenders now rely on vast teams of in-house appraisers, making independent fee appraisers scramble for work in many areas of the country. Appraisers often have been asked to play the role of Answer Man -- and not get paid to do so.

Mortgage insurance -- which the Federal Housing Administration labels mortgage protection insurance -- is commonly called private mortgage insurance (PMI) by conventional lenders. Most banks, credit unions, savings and loans and other lending institutions require this coverage for people borrowing more than 80 percent of the purchase price of the home.

Because a lack of a substantial down payment has made some borrowers more of a risk than other conventional buyers, low-down buyers must obtain an insurance policy to make sure the lender gets his payments.

If the borrower defaults on the loan and the house is not sold for enough money to repay the bank, mortgage insurance will supply the difference. The cost of mortgage insurance varies depending upon the amount borrowed and when the premiums are paid. For example, a borrower with a 15 percent downpayment will have to pay fewer mortgage insurance dollars than a borrower with a 5 percent downpayment.

If your home is worth $120,000 today and market conditions push it to $150,000 next year, some lenders would drop the mortgage insurance requirement even though the borrower has not increased his equity position with actual cash.

Many lenders like to have the loan "seasoned" at least one year before considering the possibility of deleting mortgage insurance. And, unlike conventional-loan borrowers, FHA borrowers are stuck with PMI payments until the loan is paid off.

Private mortgage insurance is often confused with mortgage life insurance. PMI is required by lenders, while mortgage life is an option for the buyer. Typically, a mortgage life policy pays off the home if the buyer dies or is disabled.

Often, the goals of mortgage life can be accomplished by purchasing a term life insurance plan. This option can be less expensive and stays with the individual, not the loan. Many people think the coverage follows the borrower, but it only follows the loan.

Mortgage life is still available if you did not accept coverage at the time you took out your loan or refinanced it. Ask the lender who wrote your loan, or the insurance agent who handles your homeowners insurance, for details.

Remember, when rates are low -- and a quick look over the past 25 years would render a "low" label now -- more people are able to qualify for home ownership because lower rates mean lower monthly payments. It also means busier times in the home-loan industry.

If you need your mortgage insurance removed with a full-blown appraisal, make sure to research the guidelines -- and the proper name of the insurance you are attempting to remove. It will save you time, energy and money -- but be ready to pay for it.

And, don't be surprised when you are not covered by new law.

Previous columns:

• Realtors debate Net's role, 07-23-1999
• Are too many millionaires ruining the area housing, 07-16-1999
• New tool in online property marketing, 07-02-1999
• Fixing up the home, 06-25-1999
• A father's gifts to his son, 06-18-1999
• Supply, not higher rates, restricting home sales, 06-11-1999
• Make sure mortgage is a safe assumption, 06-04-1999
• Is it time to refinace again?, 05-28-1999