PMI or Private Mortgage Insurance VS Mortgage Life Insurance
PMI is extra insurance that lenders require from most homebuyers who obtain loans that
are more than 80 percent of their new home's value. In other words, buyers with less than a 20 percent down payment are normally required to pay PMI. Unlike Mortgage Life Insurance, PMI or Private Mortgage Insurance does not protect the borrower but only protects the lender.
Benefits of PMI
PMI plays an important role in the mortgage industry by protecting a lender against loss if a borrower defaults on a loan and by enabling borrowers with less cash to have greater access to homeownership. With this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment. This means that you can buy a home sooner without waiting years to accumulate a large down payment.
New PMI Requirements
A new federal law, The Homeowner's Protection Act (HPA) of 1998, requires lenders or servicers to provide certain disclosures concerning PMI for loans secured by the consumer's primary residence obtained on or after July 29, 1999. The HPA also contains disclosure provisions for mortgage loans that closed before July 29, 1999. In addition, the HPA includes provisions for borrower-requested cancellation and automatic termination of PMI.
Why a Change in PMI Requirements?
In the past, most lenders honored consumers' requests to drop PMI coverage if their loan balance was paid down to 80 percent of the property value and they had a good payment history. However, consumers were responsible for requesting cancellation and many consumers were not aware of this possibility. Consumers had to keep track of their loan balance to know if they had enough equity and they had to request that the lender discontinue requiring PMI coverage. In many cases, people failed to make this request even after they became eligible, and they paid unnecessary premiums ranging from $250 to $1,200 per year for several years. With the new law, both consumers and lenders share responsibility for how long PMI coverage is required.
How Do You Cancel or Terminate PMI?
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.
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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.
Final Termination
Under HPA, if PMI has not been canceled or otherwise terminated, coverage must be removed when the loan reaches the midpoint of the amortization period. On a 30-year loan with 360 monthly payments, for example, the chronological midpoint would occur after 180 payments. This provision also requires that the borrower must be current on the payments required by the terms of the mortgage. Final termination must occur within 30 days of this date.
What If Your Home Value Has Increased?
When making mortgage payments, most of the payments during the first few years are finance charges. Therefore, it can take 10 to 15 years to pay down a loan to reach 80 percent of the loan value. If the home prices in your area are rising quickly, your property value may increase so that you can reach the 80 percent mark a lot faster. Your property value could also increase due to home improvements that you make to your home.
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. Also, be sure to ask what documentation may be required to demonstrate the higher property value. Remember that an increase in your home value does not usually warrant an increase in mortgage life insurance face amount.
For More Information
The Federal Reserve Bank of San Francisco has several other consumer brochures. These brochures are posted on our web site at: http://www.frbsf.org/publications/consumer.
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