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PMI - Know the Rules and Save Thousands

P.M.I.  (Private Mortgage Insurance)


Knowing the Rules,  may save you $$$$$  

Has your home equity increased very much - either through monthly payments or appreciation? If so, it may be time to think about canceling your private mortgage insurance.

Private mortgage insurance, called PMI, usually is required whenever a conventional loan exceeds 80 percent of a home's market value, It is designed to partially compensate the lender for losses suffered if a borrower defaults on a loan.

But many homeowners never bother to cancel the insurance after their equity reaches 20 percent. And in many cases, experts say, the lender will not remind the borrower to do so.

PMI coverage began in the late 1950's as a way of encouraging lenders to make more loans based on smaller down payments. In general, it guarantees that, in the event of a default, the lender will recoup at least 25 percent of the loan amount.

The coverage costs a typical homeowner about 1 percent of the loan amount during the first year and 0.50 percent per year thereafter. In the case of a $100,000 house, an owner would pay about $1,000 during the first year and $500 for each subsequent year. Adjustable-rate loans would cost more to insure. Premiums are divided into 12 monthly payments. 

The Federal Home Loan Mortgage Corp., known as Freddie Mac,  changed its rules in the 1990's as an effort to help some homeowners get rid of their private mortgage insurance earlier.   Mortgage lenders are required to send you an annual notice of your right to cancel (especially if your mortgage was on or after July 29, 1999 as a result of the The Homeowner's Protection Act (HPA) of 1998).   However, many people are still not aware of the rules and thereby not able to benefit from them if they mortgage company does not follow the rules.

The changes, which could enable a homeowner to save hundreds of dollars a year, applied to all new and existing mortgages from lenders that resell mortgages to Freddie Mac.  (The HPA of 1998 does not apply to VA or FHA government-guaranteed mortgages.)

When a home buyer puts less than 20 percent down on a house, Freddie Mac requires the borrower to buy mortgage insurance to guarantee payments.

Previously, Freddie Mac required that a mortgage be held at least seven years before the insurance could be dropped, even if the value of the home soared and the owner's equity rose above 20 percent.

Pre-1999  Guidelines

The insurance could be dropped in two to five years, depending on circumstances and provided that mortgage payments have been made on time.

Under the guidelines, mortgage insurance can be suspended after two years if the homeowner's equity is 20 percent and the buildup was the result of either reduction of the mortgage principal or improvements made to the home.

It can be suspended after five years if equity rises to 20 percent because of an increase in the home's market value or after two years if equity reaches 25 percent.

Under the guidelines, a lender that resells mortgages to Freddie Mac must cancel a borrower's mortgage insurance - upon request- if the borrower has:

  • Requested the cancellation in writing.

  • Maintained the coverage for two years from the loan-origination date.

  • Not been more than 16 to 29 days late with installment payments more than one time in the 12 months before requesting cancellation of the insurance.

  • Has not been more than 30 days past due any one time during the 13 to 24 months before the request.

Guidelines Under The Homeowner's Protection Act (HPA) of 1998  (Source: FRBSF)

Cancellation - Under HPA, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less. You also need a good payment history, meaning that you have not been 30 days late with your mortgage payment within a year of your request, or 60 days late within two years. Your lender may require evidence that the value of the property has not declined below its original value and that the property does not have a second mortgage, such as a home equity loan.

Automatic Termination - Under HPA, mortgage lenders or servicers must automatically cancel PMI coverage on most loans, once you pay down your mortgage to 78 percent of the value if you are current on your loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.

For high risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77 percent of the original value of the property, provided you are current on your loan.

Home Appreciation - If you think your home value has increased, you may be able to cancel PMI on your mortgage. Although the new law does not require a mortgage servicer to consider the current property value, you should contact them to see if they are willing to do so.  (You should find out if they allow cancellation BEFORE you obtain the mortgage.)  Also, be sure to ask what documentation may be required to demonstrate the higher property value. 

This is great news for consumers!

As in everything that effects your in life, you need to take control and be proactive about PMI, and keep track of your principle balance.  If you mortgage company neglects to suspend PMI, you may need to initiate the steps yourself and contact them. Just make sure you document in writing any correspondence in case problems arise with the loan provider.

Freddie Mac is a government-chartered agency that buys mortgages and packages them into securities for resale to investors. The procedure makes more money available for mortgages.

Fannie Mae, another government-chartered mortgage agency, allows borrowers to request that mortgage insurance be dropped after only 12 months if their payment history is good and a new appraisal has been made.

Now the you are more aware the rules, it's up to you to act on that knowledge and save!


Click/tap here for details about PMI and your consumer rights from the Federal Reserve Bank (SF)  [PDF]

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