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Q&A: When can I stop paying FHA mortgage insurance?

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Keywords: Human Hand, Mortgage Document, Residential Structure, House, Real Estate Agent, Real Estate, Moving House ( iStock) For Jessica Randklev. ltc (Credit: ISTOCK/iStock)

 I noticed when I got my FHA loan that I would have to pay mortgage insurance. That's fine, because I didn't have 20 percent to put down on the property when I bought it. But here's my question: When can I stop paying FHA mortgage insurance? I know I pay the monthly premium, which is built into my monthly payment, but am I ever done with paying it? By that I mean, if I pay down my loan so that I have 20 percent equity, or the value of my home goes up (if it ever does), do I stop paying mortgage insurance? When can this insurance be terminated or will it carry on until the mortgage is paid off? And since an FHA mortgage is assumable, do I need FHA's approval before my buyer assumes the loan?

The Federal Housing Administration has had several rule changes with regard to mortgage insurance that have increased the cost of FHA loans and changed the structure of the mortgage insurance payments. Under the new rules, some borrowers will pay higher mortgage insurance premiums, while others will pay none.

Given the large percentage of FHA loans that are being originated, and the extraordinarily high foreclosure rate, these mortgage insurance premium changes are designed to replenish FHA's coffers and allow it to continue without additional funding from the Treasury.

As of April 18, 2011, the Department of Housing and Urban Development increased annual mortgage insurance premiums by 25 basis points, or one-quarter of 1 percent of the loan amount.

The amount you pay depends on the length of your loan and the size of your down payment.

If your loan term is greater than 15 years, the amount of the increase depends on the size of your down payment. If the down payment is equal to or greater than 5 percent, the new annual premium is 110 basis points, or 1.10 percent of the loan amount. If the down payment is less than 5 percent, the new annual premium is 115 basis points, or 1.15 percent of the loan amount.

On loans equal to or less than 15 year terms, if the down payment is equal to or greater than 10 percent, the new annual mortgage insurance premium is 25 basis points, or 0.25 percent of the loan amount. If the down payment is less than 10 percent, the new annual premium is 50 basis points, or 0.5 percent.

Effective for regular purchase and refinance FHA loans originated on or after Oct. 4, 2010, the upfront mortgage insurance premium is 1 percent, which decreased from 1.5, according to HUD.gov.

The good news for you is that FHA's monthly mortgage insurance payments will be automatically terminated when the following conditions occur:

1. For mortgages with starting terms of 15 years or less and with loan-to-value (LTV) ratios of 90 percent and greater, annual premiums will be canceled when the LTV ratio reaches 78 percent, regardless of the amount of time the mortgagor has paid the premiums. In other words, if you suddenly find yourself with a bunch of cash, and opt to pay down your loan, your mortgage insurance payments will be canceled.

2. For mortgages with terms more than 15 years (typically 20-year or 30-year mortgages), the annual mortgage insurance premiums will be canceled when the LTV ratio reaches 78 percent, provided the borrower has paid the annual premium for at least 5 years.

Interestingly, FHA is not charging any annual mortgage insurance premiums on loans with terms of 15 years or less, whose LTV ratios are 89.99 percent or less.

So the bottom line is that if you have FHA mortgage insurance in place on your current loan, you will probably have to make those payments for some time. But you do have the ability to have those mortgage insurance premiums removed from your payments sometime in the future.  Click here to find out more.

On the issue of whether your FHA loan is assumable, you should know that the loan will be assumable, but FHA or the lender that is servicing the loan for FHA will have to review the prospective buyer's financial documents to assess whether the buyer can assume the loan.

There may be other rules relating to the assumability of the loan, and those rules should be in the document you received when you closed on the purchase of your home and obtained the FHA loan. If, after reviewing the prospective buyer's documentation and performing a credit check, the lender finds that this buyer can assume the loan, the lender will allow the prospective buyer to assume the loan.

Frequently, the buyer will have to pay a fee to assume the loan, but even with that fee the benefit of obtaining a loan at little other cost, perhaps without having a new appraisal done on the home, may make it very worthwhile.

Ilyce R. Glink's latest book is "Buy, Close, Move In!" Samuel J. Tamkin is a Chicago-based real estate attorney. Distributed by Tribune Media Services, Inc.

Need some real estate advice? Email realestate@newsday.com.

Tags: Q&A , mortgage insurance , Federal Housing Administration , Department of Housing and Urban Development

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