How to Drop Private Mortgage Insurance
Private mortgage insurance (PMI) is yet another source of overcharges and unjustified costs that homeowners need to scrutinize. You need to know how to cancel PMI when it is no longer needed, both under lending guidelines and under a new federal law that took effect in July, 1999.
Good Intentions Gone Bad. The practice of requiring PMI is actually well-intentioned. By insuring lenders against risk, PMI helps homeowners obtain financing when they can't afford to make the standard 20 percent down payment. The initial down payment can be as low as 5 percent, so long as the borrower is willing to pay an extra monthly or annual charge toward PMI. Although PMI makes the down payment more affordable, the homeowner does not otherwise benefit from paying the premiums - this insurance simply protects the bank, not the homeowner, from loss in case of foreclosure or default on the loan.
Laissez Faire Abuse. Unfortunately, PMI policies have been abused by mortgage servicers who collect premiums long after the policies should have been canceled. Don't get taken advantage of because you are unaware that your PMI should have been stopped! Under borrowing guidelines established by Fannie Mae and Freddie Mac, loan servicers must cancel PMI once the borrower has paid down a certain amount of the loan. Irresponsible loan companies have taken a hands-off approach, however by continuing to collect premiums for years, typically $300-$500 per year on a $100,000 mortgage loan. This can go on until the loan is paid off or you finally discover the problem and request cancellation.
Relief for Homeowners. Congress finally intervened in 1998 by passing the Homeowner Protection Act, legislation that requires mortgage servicers to cancel PMI automatically when it is no longer needed. AHA actively supported PMI reform. AHA President Richard Roll recommended several reforms in testimony before the Senate Banking Committee which were ultimately adopted by Congress. The new law sets criteria for canceling private mortgage insurance and establishes rights for the homeowner as well as obligations for the mortgage servicer. The new law applies only to loan transactions completed after July 29, 1999.
When can you cancel PMI?
The majority of mortgage loans are bought on the secondary market by Fannie Mae (FNMA) and Freddie Mac (FHLMC). Under Fannie Mae guidelines, the loan servicer must cancel PMI if the homeowner requests it, and the unpaid balance of the loan has been paid down to 80% of the original value of the property. But the servicer may require the homeowner to submit a current appraisal to demonstrate that the property has kept its value. Freddie Mac is more stringent because it requires the SERVICER to make a representation that the current value of the property is at least equal to the original value.
The New Homeowners Protection Act
Starting with loans made after July 29, 1999, loan providers must provide home buyers a PMI disclosure statement that includes:
- Written initial amortization schedule
- Written notice of the date on which the homeowner may request cancellation based on a standard amortization (pay down) schedule for the loan.
- For fixed rate loans, a written notice that the homeowner can request early cancellation based on making accelerated payments (adjustable rate mortgage servicers must notify homeowners when the cancellation is reached).
- That there are circumstances that might prevent cancellation or termination which must be spelled out.
- For high-risk loans, notice that PMI will not be required beyond the midpoint of the amortization period.
- Annual statement of the homeowner's rights under the new law (PL 105-216), and an address and telephone number that the homeowner may use to contact the servicer to determine the status of PMI on their mortgage.
When Can You Cancel Your PMI? Under the new law (for loan transactions made after July 29, 1999) you can request that your private mortgage insurance (PMI) be cancelled when either of the following two conditions are met:
- When, based on the original amortization schedule, the principal balance of the mortgage reaches 80 percent of the original value of the property; irrespective of the outstanding balance on that date; or,
- When, based on actual payments, the principal balance reaches 80 percent of the original value of the property.
How Can You Cancel Your PMI? Many loan servicers will agree to cancel mortgage insurance when the homeowner sends them a written request. First, fill out the PMI worksheet in this Guide to determine if you qualify to stop your coverage. Send a letter by certified mail to your loan servicer. You could start savings hundreds of dollars per year!
Once the 80% criteria is met, you can request to cancel your PMI by making a request in writing to the loan servicer. You must have a good payment history on the mortgage. In addition, you need to provide evidence to the servicer, spelled-out by the servicer when the original request is made, that the property has not declined below the original value. You must also demonstrate that there are no liens against the property.
When is cancellation automatic? Your mortgage servicer must terminate your PMI when, according to the original amortization schedule, the outstanding balance is first scheduled to reach 78 percent of the original value of your property. You must be current, however, on your mortgage payments of the PMI will continue until you are up-to-date. If the mortgage is judged to be high-risk at the time of the original transaction, the mortgage servicer may extend the PMI requirement to no later than the midpoint of the amortization schedule. High-risk is determined in accordance with guidelines published by the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac). If not cancelled by you, your PMI will be automatically terminated as outlined above so long as your are current on your mortgage payments.
Other Important conditions:
Initial transaction date: This law only applies to transactions that were completed July 29, 1999 or later.
Good payment history. The new PMI law looks at the 24 months prior to the PMI cancellation date (according to the amortization schedule). During the first 12-month period, the homeowner must not make a payment 60 or more days past due. During the second 12-month period, the homeowner must not make a payment 30 days or more past due.
Original value. The term original value is the lesser of the original sale price or the appraised value at the time of the original transaction.
PMI Cancellation Worksheet
If you are paying PMI (Private Mortgage Insurance) on your home mortgage, fill in the blanks on this worksheet to see if you qualify to stop making these payments. You could immediately start saving hundreds of dollars per year.
Note: This worksheet does not apply to FHA loans, which generally do not permit cancellation of FHA insurance payments.
A. Original purchase price
B. Original loan amount
C. Current loan value
D. Current property value
E. Current Loan-to-Value Ratio (LTV) -- Based on original purchase price
$_____________% (C divided by A)
If E is below 80%, you should be eligible to cancel PMI payments and save hundreds of dollars per year. You may have to prove to your mortgage servicer that your property value is the same or greater than when you bought your home. Also, your payment record may be taken into account.
F. Current Loan-to Value Ratio (LTV) $____________% (C divided by D)
Based on current appraised value
If F is below 80%, you should be eligible to cancel PMI payments and save hundreds of dollars per year. You will probably have to submit a property appraisal from an appraiser in a format acceptable to your mortgage servicer (call them to request details).