November 5, 1999

Your guide to mortgage insurance

By TOM KELLY
The Real Estate Advisor

Don't understand the new mortgage insurance guidelines? You are not alone. According to a recent study, few consumers are even aware of them. To compound the problem, the term mortgage insurance can mean different things to different people: mortgage life, personal (private) mortgage and mortgage unemployment. This can be confusing territory, so let's explain the specific kinds.

Mortgage life insurance: Mortgage life is commonly offered each time you take out a loan. If you purchase mortgage life insurance for the full value of your home loan, your home will be paid off if you die. It is typically offered at closing and then again after you have signed. Its big selling point is that it permits the surviving spouse to stay in the home without using other assets to pay off the mortgage.

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. If borrowers refinance, they must again state that they want mortgage life.

Sometimes consumers let the coverage extinguish when they refinance despite the fact their new loan might be larger than their old one. Reasons vary, but insurance agents say most people drop coverage because of an additional income source. Typically, a spouse or partner has taken, or upgraded, a job.

Mortgage life premiums vary depending on age, loan amount and smoker status. It 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.

Personal (private) mortgage insurance: 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.

This is the area that is subject to a new law, yet that law can help few people right away. And according to a National Association of Exclusive Buyers Agents survey, few consumers even know about the new rules.

Under the Homeowners Protection Act, PMI must be terminated when the mortgage's loan-to-value ratio reaches 78 percent of the property's "original" value AND the loan closed after July 29 1999. You must meet both guidelines, not one or the other. Borrowers must be current on all payments before the monthly premiums are dropped.

Homeowners with older mortgages don't necessarily face the same situation. 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. 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."

PMI is required by lenders; mortgage life is an option. PMI costs differ according to coverage. 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 $240,000 today and market conditions push it to $300,000 next year, some lenders would drop the mortgage insurance requirement even though the borrower has not increased his equity position with actual cash. If the loan is sold, the investor makes the final decision.

Unlike conventional-loan borrowers, FHA borrowers are stuck with PMI payments until the loan is paid off.

Mortgage unemployment insurance: This coverage is difficult to find on the market and will pay an individual's monthly mortgage payment, including principal, interest, taxes and any escrow impounds, should the insured become involuntarily unemployed. Payments are made directly to the lender or lien holder, not to the individual policyholder.

Premium costs vary greatly, yet average about 3.5 percent of the monthly mortgage payment. But the cost varies depending on the occupation.

There are 1,200 insurable positions (some with costly premiums).

Variables include the type of job, geographic location and monthly mortgage payment amount.

For example, if your monthly mortgage payments are $1,000, your mortgage unemployment insurance would cost about $35 a month. The policies can be extremely pricey and may not make sense for some borrowers.

Mortgage insurance has many meanings. Don't be confused at closing. Check your options before proceeding.

Previous columns:

• Who needs HUD?, 10-29-1999
• A closer look at inspections, 10-22-1999
• HUD earns its criticism and praise, 10-15-1999
• NAR faces stock option scandal, 10-08-1999
• Taking on a partner in buying a house, 10-01-1999
• Do you really need a broker?, 09-24-1999
• Two new options for homebuyers, 09-17-1999
• Sears kit houses are still around, 09-10-1999