Last week I had lunch with friends who are in the process of refinancing their home. As part of the refinance loan paperwork, there is a document that states that "mortgage insurance" may be required. My friends thought this to be a life insurance policy protecting them in case of death. This is a very common misunderstanding that borrowers have. There is an insurance policy that protects one if he or she were to die . . . it is called life insurance. Life insurance marketers have developed many descriptive names for this insurance, yet it does one thing . . . it protects your family if you die. Mortgage insurance is not life insurance. It has a particular function; it protects the lender in case you default on your mortgage payments.
Many people, today, have mortgage insurance. For most of us, it is very difficult to accumulate the twenty percent lenders would like to have as a downpayment on a home. Unless we have twenty percent the lender will require mortgage insurance. In most cases, you will pay a monthly premium insuring the lender so that if a default occurs the lender will have resources to offset the smaller downpayment you made as well as the costs of taking back the home and doing what is necessary to market and sell the property.
Mortgage insurance provides the opportunity for many to get into a home of their own and fulfill the "American Dream." For a relatively small monthly payment a buyer can borrow more than she ordinarily could if a twenty- percent downpayment were required. The mortgage insurance industry has made it possible for buyers to buy a home many years earlier than would be the case if they had to save 20 percent for a downpayment.
It has become such an accepted financing vehicle that more than 17 million people over the past 40 years have taken advantage of mortgage insurance. Mortgage Insurance Companies of America, a trade organization representing mortgage insurance companies, states that MI has helped more than five million families in the past five years buy homes. MICA also states that through MI, which affords the buyer more options, the U.S. homeownership rate is now 66 percent.
I personally know the advantages of MI as I deal with first time homebuyers and see the benefits that accrue to homeownership. I also know, as I mentioned above, there is much misunderstanding and sometimes confusion as to why one must have MI. Beyond the basics of understanding MI, many do not know that MI premiums are not for the life of the loan.
How would you like to have a forum where you can make your voice heard? Very few of us, unfortunately, have this opportunity. One such individual, who does, is Representative James V. Hansen of Utah. Congressman Hansen has a home in Utah as well as a condo with mortgage insurance in Washington, D. C. He tried to cancel the MI on the condo. His request was refused. What did he do? He introduced legislation in Congress that became "The Homeowners Insurance Protection Act." It passed the House Banking and Financial Services Committee by a vote of 36-1. It provides for the automatic cancellation of mortgage insurance. It stipulates that the lender must cancel MI when equity equals 25 percent of the original value of the home. As much as the House recognizes the benefits of mortgage insurance it also stated that homeowners should not be paying unnecessary insurance costs.
The Senate also passed a bill, SB 318, stating under what conditions homeowners have the right to cancel MI. The difference is that the Senate bill, introduced by Senator D'Amato, would require the borrower to have a 20 percent equity position in his/her original loan. This distinction can make a substantial monetary difference. If your home appreciates and/or you paid extra to principal to reduce the lender's risk, you still cannot petition to remove MI, if you have not paid off 20 percent of the original loan. Based upon certain assumptions, you may not, according to the Senate bill, be able to remove MI until you have made actual dollar payments to reduce the loan balance. The House would allow you to use appreciation as well as loan payoffs to calculate the equity position.
Without going into the numbers in this column, the House bill can possibly cut your time of MI payments by about half (it uses appreciation . . . The Senate's bill does not.) I spoke with a staff member for the House's Committee on Banking and Financial Services and he stated that during this session of Congress, the House may either approve the Senate bill or take the two bills into conference committee. The State of California has already passed and the Governor has signed legislation introduced by Assemblymember Shelley that specifically addresses the mortgage insurance issue. It, however, only addresses notes made or executed on or after January 1, 1998.
Mortgage insurance is an insurance that does effect many homeowners. It is money paid that can be money saved, if we take action. It also is not automatically cancelled and there is no telling if either of the Congressional bills will be passed this year (an election year.)
As it currently stands, homeowners must request of the lender the removal of MI. You can do this by calling the 800 number of your servicing lender and requesting the criteria and documentation needed to eliminate mortgage insurance and thus begin using the savings for your own purposes. It would be beneficial for each of us to keep an eye on Congress as to which version of its bills will benefit the homeowner with MI the most.
Copyright © 1999, jjrmf.com