- The Washington Times - Wednesday, October 22, 2003

Q: I have mortgage insurance on my primary residence, which I have had for a year and one month. I originally did a 10-percent-down loan with my lender. We made lots of improvements on the home, which is in a great neighborhood, and appreciation has been good.

I paid for an independent appraiser to re-appraise our house. Our equity now is about 24 percent. I sent a copy of the appraisal along with a request for my lender to drop the mortgage insurance; however, they refused, saying it was their policy to wait two years regardless of the equity we now have.

They would not honor an independent appraisal, and now we would have to pay one of their appraisers after the two years elapse. Is this right and legal?

A: You’re referring to the regulation change a few years ago that has forced mortgage lenders to drop the private mortgage insurance (PMI) paid by borrowers with less than 20 percent equity in their homes. Now, under the new regulations, once your equity increases above 20 percent, you can request that the PMI requirement be dropped. Keep in mind, however, that this is not an automatic reduction.

Your mortgage lender is making sure it protects its PMI requirement from an overactive real estate market. Your equity has more than doubled in just over a year — good for you, but give it a couple of more years and it may drop again. That’s what the lender is afraid of, and the regulations allow it to require PMI for a certain period of time, regardless of the equity level.

In the long haul, the payment for another appraisal is not that expensive when you consider that the PMI payment could cost you thousands of dollars over the coming years. Be patient and refile your application in a few more months.

Q: I am thinking about refinancing my current loan to a CODI, COSI or COFI loan. In your experience, are these good loan programs? Are there some “gotchas” that I am not seeing?

A: These adjustable rate, index-based mortgages — certificates of deposit, cost of savings and cost of funds indexes — start out with very low interest rates. Two of the issues a borrower should watch for include:

• The annual caps. How high can the interest rate increase per year, and then how high can the rate go over the term of the loan? If your rate starts at 3 percent with a 2-point margin, your rate would be 5 percent — however, what can it move up to throughout the year?

If it can move 2 points, then you could possibly be up to a 7 percent loan within the year. If the term allows 10 points of movement, then you could be at a 15 percent loan at times through the life of the loan. Is that a risk you’re willing to live with?

Looking at the indexes, you’ll find that they haven’t moved very high over the last 10 to 15 years, but past performance never guarantees future results.

• Negative amortization. This is when your payment does not cover the full cost of the loan. Let’s say that you start at 4 percent but that rates go up to 7 percent and you have a loan that guarantees it won’t increase by more than 7 percent of your payment from one year to the next. So your $1,000 payment doesn’t go above $1,070 for the next year, but the cost of paying a loan of 7 percent should actually be $1,300. You’re obviously not keeping up with what the cost of the loan is to you, and now, that $230 deficit is being added to your bottom line. Instead of paying down your loan amount, it’s growing — negative amortization.

These are the two issues to watch for. Economists see interest rates moving north by the end of the year. Talk through all the pros and cons with your loan officer before moving forward.

Personally, I’ve had a COFI loan, and it worked well for my personal residence.

M. Anthony Carr has covered real estate for more than 15 years. Contact him by e-mail ([email protected]).

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