Private Mortgage Insurance Doesn't Protect Homeowners
BATTLECALL GUEST EXPERT: George Burkes, Loan
Officer
If you borrowed more than 80% of the appraised value of you home, you're
probably paying private mortgage insurance (PMI). PMI that is not lender paid is
a waste of money. If you default on your mortgage, the private mortgage
insurance provider will pay the lender, but you still would lose your home. PMI
does not offer you any benefits whatsoever. PMI payments aren't even
tax-deductible.
PMI increases your effective mortgage interest rate. On a $100,000 loan with
10 percent down ($10,000), PMI would cost you $43 a month. If you can cancel the
PMI, you can save $516 a year and many thousands of dollars over the course of
the loan. If your down payment was less, the cost of your PMI will be greater.
If your down payment was 5%, ($5,000), your PMI expense would cost you $780 a
year or $65 a month. Check your annual escrow account statement or call your
lender to find out exactly how much PMI is costing you each year.
When you purchase a home and put down less than 20 percent down, most lenders
will require you to purchase PMI. You are purchasing insurance to protect the
lender if you default on the loan. The Homeowners Protection Act of 1998
establishes rules for automatic termination and borrower cancellation of PMI on
home mortgages. These protections apply to certain home mortgages signed on or
after July 29, 1999 for the purchase, initial construction, or refinance of a
single-family home. These protections do not apply to government-insured FHA or
VA loans or to loans with lender-paid PMI.
New borrowers covered by the law must be told, at closing and once a year,
about PMI termination and cancellation. Mortgage providers must provide a
telephone number for all their mortgage borrowers to call for information about
termination and cancellation of PMI.
Even though the law's termination and cancellation rights do not cover loans
that were signed before July 29, 1999, or loans with lender-paid PMI signed on
any date, lenders or mortgage providers must tell all borrowers about the
termination or cancellation rights they may otherwise have under those loans
(such as rights established by the contract or state law).
The following applies for home mortgages signed on or after July 29, 1999.
Your PMI must - with certain exceptions - be terminated automatically when you
reach 22 percent equity in your home based on the original property value, if
your mortgage payments are current. Your PMI also can be canceled, when you
request - with certain exceptions - when you reach 20 percent equity in your
home based on the original property value, if your mortgage payments are
current.
One exception is if your loan is high-risk. A cash-out refinancing would be
considered high-risk. Another is if you have not been current on your payments
within the year prior to the time for termination or cancellation. A third is if
you have other liens on your property. For these loans, your PMI may continue.
Ask your lender or mortgage provider (the company that collects your payments)
for more information about these requirements.
The following applies for home mortgage signed before July 29,
1999.
You can ask to have the PMI canceled once you exceed 20 percent equity in
your home. But federal law does not require your lender or mortgage service
provider to cancel the insurance.
Some states may have laws that apply to early termination or cancellation of
PMI - even if you signed your mortgage before July 29, 1999. Call your state
consumer protection agency for more information about your state's rules.
Contact your lender or mortgage provider to learn whether you're paying PMI. If
you are, ask how and when it can be terminated or canceled. Fannie Mae and
Freddie Mac, which buy home mortgages from lenders, also may have guidelines
affecting termination or cancellation of PMI on home mortgages signed before
July 29, 1999. Check with your lender or call Fannie Mae or Freddie Mac, for
more information.
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