Dear Mr. Azrael:
I am writing to you for clarification on mortgage insurance.
Originally I applied and was approved for a 7.5 percent FHA loan. The lender was North American Mortgage in Columbia, Md. The loan has been sold twice.
Recently I phoned [the new mortgage holder] to discuss the discontinuation of the monthly mortgage insurance payments. I was told that, because I had an FHA mortgage with the mortgage insurance owned by HUD, I was required to pay monthly mortgage insurance for the life of the mortgage or until I sold the home.
Is this accurate? I had believed mortgage insurance could be terminated when the equity in the home reached 20 percent of the value of the home.
Can you suggest any recourse I might have for ending mortgage insurance payments, short of selling my home?
Zana Dell, Baltimore
Dear Ms. Dell:
The holder of your FHA-insured loan is right.
When the FHA insures a mortgage, the borrower pays an upfront mortgage insurance premium and/or a monthly mortgage insurance premium. The monthly premium must be paid so long as the loan is outstanding. If the loan is paid off, you may be eligible for a refund of a portion of the upfront insurance premium. To be eligible for a premium refund, you must have taken out your loan after Sept. 1, 1983; paid an upfront mortgage insurance premium at closing; and did not default on your mortgage payments
There are exceptions.
When an FHA-insured loan is assumed, the seller receives no refund because the insurance remains in effect. The owner of the property at the time the insurance is terminated is entitled to any refund. Also, when an FHA-insured loan is refinanced with an FHA-insured loan , the refund from the old premium may be applied toward the upfront premium required for the new loan.
The FHA determines how much of the upfront premium is refunded when loans are terminated. The FHA advises: "Refunds are based on the number of months the loan is insured. After 84 months (seven years) no refund is due the homeowner." Your mortgage lender should be able to assist you in finding out how much of a refund you would get by terminating your FHA-insured loan.
The rules for FHA-insured loans are different than for loans insured by private mortgage insurance (PMI). For mortgage loans taken out or refinanced after July 29, 1999, federal law requires lenders to automatically terminate PMI when the borrower has paid down the loan to the point at which it equals 76 percent of the original purchase price.
You can terminate your FHA-insured loan by refinancing your property with a conventional loan. But based on today's mortgage interest rates, you probably will have to pay a fixed-rate higher than the 7.5 percent fixed rate on your FHA-insured loan.
A bank or mortgage lender can show you payment schedules so you can judge whether it's worth refinancing. When interest rates fall and you can get a conventional loan at 7.5 percent or less, refinancing may be the route to go.
Real estate questions are answered by Jonathan A. Azrael of Azrael, Gann and Franz of Towson. Questions, with name, address and daytime phone number, may be faxed to 410-783-2517, e-mailed to email@example.com or mailed to: REal Estate Mailbag, Second Floor, 501 N. Calvert St., Baltimore, MD 21278-0001.
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