It is one of the key trade-offs for anyone who wants to buy a house but doesn't want to make a big down payment: The lender will okay your mortgage application, but only if you agree to pay private mortgage insurance (PMI) premiums every month.
Those premiums, paid by an estimated 5 million U.S. homeowners, can add $50 to $150 a month to your mortgage bills and can continue for close to a decade.
Now one player in the mortgage insurance industry has begun giving buyers the option to nail down a precise date in advance for canceling premium payments. Philadelphia-based Radian Guaranty Inc. will automatically terminate certain homeowners' monthly payments after 60 months -- five years -- of coverage. No property appraisals and no formal borrower requests to the lender are necessary. The main requirements are that the homeowners maintain a solid history of on-time payments in the first five years, have a FICO credit score no lower than 660 and agree to pay slightly higher monthly premiums.
For a 30-year, 6 percent, $180,000 first mortgage with a 10 percent down payment on a $200,000 home purchase, the higher premiums would range from $7 to $8 more a month through year five, compared with standard Radian PMI premiums for the identical loans.
Radian's new "Free After Five" plan, launched Sept. 8, is part of an industry-wide effort to deal with consumer criticism of PMI coverage. Other efforts include a congressional campaign to amend the tax code to make mortgage insurance premiums deductible against federal taxes and the introduction of discount-priced "lender-paid" insurance that automatically makes premiums tax-deductible by including them in the mortgage interest rate.
The Radian program aims at consumer unhappiness about the uncertainties surrounding termination of mortgage insurance premium payments. The federal Homeowners Protection Act of 1998 mandated automatic cancellation of PMI whenever a borrower's loan balance is paid down to 78 percent of the home's value at the time of purchase. To qualify, borrowers must have on-time loan payment histories for the year before termination and no other mortgage liens against the property.
But that automatic termination can take a long time to happen -- seven to nine years, depending on the loan amortization schedule. That is too long a wait for many consumers. As an alternative, the 1998 law also established procedures whereby borrowers with mortgages originated on or after July 29, 1999, can request termination of insurance payments whenever their mortgage balance hits 80 percent of the original value of their homes; in other words, when their equity position hits 20 percent. Typically, such homeowners must pay for a full appraisal conducted by an appraiser selected by their lender or loan servicer. That appraisal, in turn, may come up with a value lower than the borrower anticipated, leaving the insurance coverage and premium payments in place.
The borrower-requested PMI cancellation route -- much in demand in high-appreciation real estate markets -- also comes with its own complexities. For example, if the insured mortgage is owned by investors Fannie Mae or Freddie Mac, their rules govern whether a homeowner's request for cancellation is approved or not. As general policy, neither company will agree to PMI cancellations within the first two years of the mortgage, even in hyperinflationary markets where property values are gaining at double-digit annual rates.
Both Fannie and Freddie insist on a higher borrower equity standard -- a 25 percent stake rather than 20 percent -- for cancellation requests between two and five years of a mortgage origination. Neither will agree to borrower-initiated PMI cancellation requests if the homeowners have made a payment 30 days late in the 12 months preceding the request or a 60-day late payment in the preceding 24 months.
Radian's plan -- almost guaranteed to be matched by competing mortgage insurers in the months ahead -- seeks to bypass the uncertainties and hassles of the standard cancellation procedures. It also includes a carrot for lenders who offer it to home buyers: Although the borrowers' insurance payment responsibilities will stop at month 60, Radian's coverage of the lender against financial loss caused by borrower delinquencies continues in force until the automatic termination date.
It's a win-win concept for the lender and the consumer, Radian executives say. But of course, the date-certain cancellation feature is inherently a trade-off itself: It costs the borrower extra every month, but costs the lender or servicer nothing at all.
Kenneth R. Harney's e-mail address is email@example.com.