Private mortgage insurance (PMI) is insurance against the non-payment of, or default on, an individual mortgage or loan involved in a residential mortgage transaction. It protects a lender against loss if a borrower stops making mortgage payments. It also makes it possible for you to buy a home with as little as a 3-5 percent down payment.
This federal law, Public Law 105-216, effective as of July 29, 1999, requires automatic cancellation and notice of cancellation rights with respect to PMI, anytime it is required as a condition for entering into a residential mortgage contract transaction. This information must be sent using either the IRS' Form 1098 (Mortgage Interest Statement) or in the lender's annual escrow account disclosure statement on a standardized (the lending industry's or the lender's own) form.
The Homeowner Protection Act is designed to remove confusion in the private mortgage insurance (PMI) cancellation process. In summary, the law provides:
Mandatory Initial Disclosure - At the time the transaction is consummated, the lender must provide written notice of when PMI may be cancelled based on payment schedule (for a fixed rate mortgage) or that the lender will notify the customer when the cancellation date is reached (for an adjustable rate mortgage).
Borrower-Initiated Cancellation - When the balance of the mortgage reaches 80 percent of the original value of the property, the borrower may request in writing that PMI be cancelled.
Automatic Termination - When the balance of the mortgage reaches 78 percent of the original value of the property, the lender must automatically terminate PMI, provided that payment is current.
Annual Disclosure - The lender must provide an annual written statement detailing the rights of the borrower to cancel PMI should qualifications be met. The lender must also provide an address and phone number that the borrower may use to contact the servicer to determine if PMI may be cancelled.
The following are the types of conditions/terms usually imposed on homeowners for mortgages originated prior to 7/29/99, before PMI termination will be considered:
Studies have shown that homeowners with less than 20 percent invested in a home are more likely to default on their loans, making low down payment mortgages risky to lenders. Lenders require PMI on low down payment mortgages to reduce their risk should the borrower default on the loan.How Does PMI Help Me?
Private mortgage insurance makes it possible to buy a home sooner because you don't have to put down as much money up front.
The larger loan possible with PMI boosts your tax deductions for mortgage interest.How much does it cost?
Premiums vary. They are determined by the size of the down payment, the type of mortgage and amount of insurance. Premiums are typically included in your monthly mortgage payment. The average range for a $100,000 loan is $25 to $65 per month. Different payment schedules are available. Contact your lender to discuss your options.
If the current balance of your mortgage is less than 80% of the original purchase price of your property and your mortgage was originated prior to 7/29/99, it is possible you may no longer be required to continue paying PMI. Contact your lender for more information. If it was originated after 7/29/99, it must automatically terminate when your balance reaches 78% of the original value of your home. You may also initiate termination, in writing, when your balance reaches 80% of the original value.
If the value of your property has increased, due to home improvement or market conditions, you may no longer be required to pay PMI. If the current balance of your mortgage is less than 80% of the current value of your property, your lender may allow you to terminate PMI. Most lenders will require an appraisal (at cost to you). For example, a homeowner who owes $160,000 on a $200,000 home still owes 80% of the home's value. But if that home's value has grown to $400,000, the debt now represents only 40% of the home's value. Contact your lender for more information.
Recent federal data has shown that the average home value in Massachusetts increased 7.9% in the past year alone. Now might be a good time to see if you qualify to cancel your PMI.
Data courtesy Massachusettes Secretary of State. Non-federal may vary from state to state.