Homeowners Rights on Cancellation of Mortgage Insurance
Homeowners look forward to cancellation of private mortgage insurance. PMI insures the lender in case the borrower does not pay. It does not help the homeowner, but the homeowner pays the monthly charge. The Homeowners Protection Act of 1998 gave homeowners automatic cancellation and borrower's requested cancellation rights on PMI. The law exempts government-insured FHA or VA loans, but qualifying loans get automatic cancellation of PMI insurance when 22 percent of the principal is paid.
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Advantages of PMI
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Private mortgage insurance allows an individual to buy a home without the typical 20 percent down payment. Twenty percent was a standard down payment for a home purchase until PMI became available, allowing zero down options or lower down payments of 2 to 5 percent. For the privilege of buying the home with less money down, the borrower pays a monthly fee to insure the lender in case the borrower fails to make the payments. When the principal payment reaches the equivalent of 20 percent down, the PMI coverage may be lifted.
Homeowners Protection Act
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With the Homeowners Protection Act, more borrowers are familiar with PMI. One of the provisions of the Act is to notify the homeowner at closing and once each year about termination and cancellation of PMI. The homeowner can request cancellation when 20 percent of the principal is paid, and the lender must cancel automatically at 22 percent payment unless the borrower does not meet conditions.
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Cancellation at 20 Percent
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The mortgage must be a residential mortgage transaction to come under the HPA. This is a single-family dwelling that is the principal residence of the borrower. High-risk loans may not receive the same treatment. Non-conforming mortgages or those for high amounts may be high risk. The original paperwork identifies most high-risk mortgages. You must have a good payment record to get the PMI removed at 20 percent. A good payment record requires no payments more than 30 days late in the last year or 60 days late in the last two years. You must not have a second mortgage on the home, and the lender can request information about decreased value.
Other Conditions for Cancellation
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The lender must cancel automatically at 22 percent of the principal paid unless you are not current on the loan. Once you are current with your loan, the lender must cancel the PMI. If the PMI coverage continues for any reason, the lender must cancel private mortgage insurance coverage when 50 percent of the total payments are completed. This is midpoint of the amortization period, so if you have a 30-year loan, payment 180 would be half-way. You must be current on your payments, but no other conditions exist at this point.
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References
- Federal Trade Commission: Cancellation of Private Mortgage Insurance: Federal Law May Save You Hundreds of Dollars Each Year; July 2000
- Federal Reserve Bank of San Francisco: Private Mortgage Insurance (PMI): New Law Requires Lenders to Cancel PMI
- U.S. Department of Housing and Urban Development: PMI Act Information
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