Many home buyers who put down less than 20% at loan closing are required to pay for private mortgage insurance or PMI. In the past, some homeowners had difficulty getting their PMI cancelled once they reached 20% equity.
That is why the US government passed the Home Owner’s Protection Act of 1998. The law took effect on July 29, 1999. It addressed several difficulties that some mortgage holders had with PMI in the past. Generally, the Act requires lenders to provide notification and disclosure regarding the cancelling of PMI. It also requires the lender to return unearned premiums.
As of 2018, regulatory and lending requirements require US buyers to purchase PMI when a loan has a loan to value (LTV) of more than 80%. This means there is less than 20% equity in the property. The PMI premium is paid each moth with your regular payment of interest, principal and escrow. Lenders have not always been uniforming in policies about releasing the borrower from PMI payments once they reached 20% equity. In some cases, borrowers have continued to pay for PMI even when they had more than 20% equity in the home. Once the borrower no longer is paying PMI, this results in a reduction in mortgage payment.
The Home Owner’s Protection Act of 1998 applies to single family homes, investment properties, and multifamily dwellings. The Act states that the lender is required to release the borrower from PMI payments once the balance of the loan is at 80% LTV, if the borrower requests it in writing.
Once the LTV on the loan reaches 78% of the original value of the property, it is required for the lender to automatically terminate the mortgage insurance. However, release of the obligation to pay PMI is not mandatory on the part of the lender if the borrower does not have a steady payment history.
However, even when PMI is still paid when the borrower has an unsteady payment history, when the loan has been reduced to 50% LTV, and the borrower is current on mortgage payments, the Act requires PMI to be terminated.
The law also requires the lender to provide certain disclosures when the loan closes. The disclosures will vary depending upon the loan being a fixed rate, adjustable or a higher risk loan. Various annual notices are required from the lender depending upon the type of loan. Also, notices must be sent from the lender when PMI is cancelled. Notices also are required if you are denied termination of PMI.
The Act also outlaws any charge or any other cost to be assessed against you for complying with this law. Also, Regulation Z, also known as the Truth in Lending Act, requires that your payment schedule reflect your PMI payments until the date on which the lender must terminate mortgage insurance coverage.
Overall the Act provides you with protection from some past lender abuses who were late in cancelling PMI, or even refused to do so. The Act lays out specific termination deadlines and set up penalties for lenders who refuse to cancel PMI when they are supposed to.
A few years ago it was more difficult to get a loan with no PMI, so many borrowers were forced to take out home loans that required private mortgage insurance.
Want to Cancel PMI Sooner?
Few Americans like to pay PMI every month. But that insurance serves a very good purpose: It pays back the lender if you default on the loan. Why does this matter to you? It matters because PMI allows the lender to extend credit to people who have less than a 20% down payment. Without PMI, millions of families would have to continue to rent until they had at least a 20% down payment.
If you want to get rid of that annoying PMI payment sooner than later, here are some things to do:
- Remodel the home: If you add living space or remodel your kitchen, you may be able to add value to the home. When the home goes up in value, your equity increases. Once your have at least 20% equity, you can cancel your PMI. Make sure you are adding things to the home that really add value; kitchen and bathroom upgrades are usually a good bet, as is adding an addition on the family room.
- Prepay the mortgage: Even if you add only $50 a month to your home loan payment, this can add up over time.
- Order a new appraisal: Some home lenders will look at a new appraisal instead of the sales price when you bought it when they decide if you can have PMI cancelled or not.
If you cannot get the lender to drop PMI, you may want to refinance with another lender. If you have 20% equity, the new lender will not require you to have PMI. But if you have missed mortgage payments lately, you will have trouble getting anyone to refinance the loan. So be sure to make all your payments on a timely basis.
References: Private Mortgage Insurance and the Homeowner’s Protection Act. (2016). Retrieved from http://corporate.findlaw.com/business-operations/private-mortgage-insurance-and-the-homeowner-s-protection-act-of.html and How to Dump PMI ASAP. (2017). Retrieved from http://www.foxbusiness.com/features/2016/01/27/how-to-dump-pmi-asap.html