What do you mean by PMI?
The extra insurance which is required by the lenders from most homebuyers who procure loans that are more than 80% of their new home’s value is known as PMI. In other words, the buyers who have less than a 20 per cent down payment are required to pay PMI.
Benefits of PMI
If at any time a borrower defaults on a loan, it is the PMI which protects the lender against loss and also enables borrowers with less cash to have greater access to homeownership, and hence the PMI plays a very significant role in the mortgage industry. And with the help of such insurance it becomes possible for you to buy a home with as little as a 3 to 5 per cent down payment.
New PMI Requirements
The Homeowner’s Protection Act (HPA) of 1998 or in other words new federal law asks the lenders or servicers to offer or put forth some disclosures regarding the PMI for loans secured by the consumer’s primary residence obtained on or after July 29, 1999. There too are some disclosure provisions for mortgage loans offered by the HPA before July 29, 1999.
Why a Change in PMI Requirements?
The past days have seen the lenders being honored by consumers’ requests to drop PMI coverage if ever their loan balance was paid down to 80 per cent of the property value and they had a good payment history.
The Homeowner’s Protection Act (HPA) of 1998
The way the Loans Are Covered
While the HPA most of the times applies to residential mortgage transactions obtained on or after July 29, 1999, but it simultaneously also has requirements for loans obtained before that date. The new law, however, does not cover VA and FHA government-guaranteed loans. The new law too has different requirements for loans classified as ‘high-risk’.
Cancellation of PMI
Whenever you pay down your mortgage to a level that it equals 80 per cent of the original purchase price or appraised value of your home at the time the loan was obtained, whichever is less, you can request cancellation of PMI under the HPA. There are chances too that the lender may ask for some evidence that the value of the property has not declined below its original value, for instance the home equity loan.
Once you happen to pay down your mortgage to 78% of the value if you are current on your loan, it is likely that your mortgage lenders or servicers might automatically cancel your PMI.
As per the HPA, if by chance the PMI has not been cancelled or terminated, whenever it reaches the midpoint of the amortization period, coverage has to be removed. According to this provision, the borrower has to be very current on the payments which are required by the terms of the mortgage. Final termination has to occur within 30 days of this date.
What Disclosures Does the HPA Require?
For Loans Obtained on or after July 29, 1999
There are three different times when the lender or servicer is required to notify a consumer of his or her rights. The content of disclosures often varies depending on whether: (1) PMI is “borrower-paid PMI” or “lender-paid PMI,” (2) the loan is classified as a “fixed rate mortgage” or “adjustable rate mortgage,” or (3) the loan is designated as “high risk” or not.
At the closing of the loan, lenders are required to disclose all of the following to borrowers:
- The right to ask for the cancellation of PMI and the date on which this request can be made.
- The condition that PMI be terminated automatically and the date on which this will take place.
- Any exception to the right to cancellation or automatic termination.
- A written initial amortisation schedule (fixed-rate loans only).
Your mortgage loan servicer must send borrowers a written statement annually which discloses:
- The right to cancel or terminate the PMI.
- An address and telephone number to contact the loan servicer to determine when PMI may be cancelled.
A notification must be sent to the consumer when the PMI coverage is cancelled or terminated making it very clear that:
- PMI has been terminated, and the borrower no longer has PMI coverage.
- No further PMI premiums are due.
For Loans Obtained before July 29, 1999
For all those whose mortgages were obtained before July 29, 1999, an annual statement must be released for all such customers. This statement must make it very clear that under certain circumstances PMI may be cancelled. This statement must also offer an address and telephone number to contact the loan servicer so as to determine whether PMI may be cancelled.
However, the HPA’s cancellation and the automatic termination rules are not subjected to loans taken before July 29, 1999. It has been seen that several lenders report that they plan to follow the HPA’s requirements for both new and existing loans, even though their loans have been obtained on or after July 29, 1999.
You must call your mortgage loan servicer in order to know how the law applies to you and your mortgage.
What If Your Home Value Has Increased?
When you begin to make your mortgage payments, most of the payments which you make during the first few years are finance charges. So in order to reach 80 per cent of the loan value, you are likely to take 10 to 15 years to pay down a loan.
It is likely that if home prices in your area are rising quickly, even your property value might see an increase just so you can reach the 80 per cent mark a lot faster. All the home improvements which you may make to your home too might help you increase your property value.
You might even be able to cancel the PMI on your mortgage if you think that there has been an increase in your home value. You must as well contact your mortgage servicer to consider the current property value even though the new law does not really ask you to do so.
(photo source: Flickr)