Don't expect the FHA to bend rules on its MIP


Dear Mr. Azrael:

I bought a townhouse in June 1997 at an auction for $89,000. At the time, I [got] an FHA 1-year adjustable rate mortgage with an interest rate of 6 percent.

I decided on an adjustable mortgage because I wasn't sure if I would hold onto the property for more than a few years. I did a considerable amount of work on the property during the first year that I lived there, and began renting it out in 1998 when I went back to school full time.

The adjustable rate climbed by 1 percentage point each year. In November 2000, when my interest rate was 8 percent, destined to become 9 percent at year's end, I converted my FHA adjustable rate mortgage to a fixed rate of 8 percent through what was called a "streamline conversion."

Being that it was now a rental property, I did pay a half-point at settlement to acquire this rate, but the remainder of the settlement procedure involved no cost to me

I now have greater than 30 percent equity in this property. I have read articles regarding new federal legislation allowing mortgage insurance to be dropped ... but the lender says that they won't consider dropping [it] on any FHA loan unless the loan was originated after January 2001.

Do you think that there is any way to get the lender to reconsider their stance being that: I have been an exceptional customer for the last four years, [and] I have greater than 30 percent equity in this home.

If not, do you think it's worth considering refinancing now with a conventional loan to drop the [mortgage insurance] and possibly get a better interest rate?

Jeff Swett


Dear Mr. Swett:

The Federal Housing Administration has established rules for the automatic cancellation of its annual mortgage insurance premium (MIP).

Effective for all loans closed on or after Jan. 1, 2001, FHA's annual MIP will be terminated automatically once a home's equity reaches 22 percent. FHA-insured loans on condominiums or Section 203(k) rehabilitation loans are not eligible for MIP cancellation.

FHA's calculation of the 22 percent threshold will be based on the original loan amount, excluding the upfront MIP. The upfront MIP rate has been reduced to 1.50 percent of the original loan amount, regardless of the term or the mortgage.

The FHA is advising borrowers of the amount their loan balance must reach in order to cancel the annual MIP.

Borrowers who choose to pay additional principal on their mortgage can reach the 22 percent threshold sooner and can obtain cancellation of the annual MIP upon request directed to their servicing lender. But annual MIP will not be canceled during the first five years of the loan or in cases where the borrower has been more than 30 days late on the mortgage during the preceding 12 months.

FHA-insured loans with an original term of 15 years or less and a loan to value ratio of less than 90 percent are not subject to annual MIP.

The FHA's new MIP cancellation rules don't apply to mortgages originated prior to Jan. 1, 2001. Therefore, Mr. Swett, you're out of luck since you closed on the loan prior to Jan. 1, 2001. You have no right to make your lender cancel MIP no matter how good a customer you are or how much equity you have in the property.

To take advantage of the MIP cancellation program, a borrower should consider an FHA streamline refinance or a refinance for a 15-year term. A portion of the upfront MIP paid on the existing FHA-insured loan can be applied against the 1.50 percent upfront MIP on the refinancing loan.

Borrowers like Mr. Swett, who have substantial equity in their property, should consider a conventional (nongovernment) refinancing loan.

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