What is Private Mortgage Insurance?

Remember how great buying a home was with very little down? Many people were able to exchange an expensive down payment in return for insurance that would protect the lender in case of buyer default. 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. The benefit is that you can buy a home sooner without waiting years to accumulate a large down payment. The detriment is that this insurance can add to your monthly mortgage payment.

This type of insurance is known as Private Mortgage Insurance (PMI) and is insurance against the non-payment of, or default on, an individual mortgage or loan involved in a residential mortgage transaction. It protects a lender against loss if a borrower stops making mortgage payments. It also makes it possible for you to buy a home with as little as a 3-5 percent down payment. In most cases, a borrower who makes less than a 20 percent down payment must buy PMI until the loan is paid down to 80 percent of the purchase price. At that point, he can request the extra insurance be dropped.

The purpose of this article is to discuss how to get rid of PMI insurance, educate you on the law which oversees the industry, and provide you with the 5 steps of dropping PMI.

There are 2 basic ways to rid yourself of paying PMI. The property must appreciate so your mortgage is 80% of the market value of you must pay down the loan to where the loan is 80% of the property value. Many homeowners don’t keep up on this information. Is it actually the home owners’ responsibility or is it the responsibility of the Mortgage provider to track when to stop PMI payments? The Homeowner Protection Act of 1998 addresses this question.
Private Mortgage Insurance |The Homeowner Protection Act of 1998 (HPA)

This federal law, Public Law 105-216, effective as of July 29, 1999, is designed to remove confusion regarding the PMI cancellation process. In summary, according to the SEC, the law provides:
For Mortgages Originated On or After July 29, 1999

* Mandatory Initial Disclosure - At the time the transaction is consummated, the lender must provide written notice of when PMI may be cancelled based on payment schedule (for a fixed rate mortgage) or that the lender will notify the customer when the cancellation date is reached (for an adjustable rate mortgage).
* Borrower-Initiated Cancellation - When the balance of the mortgage reaches 80 percent of the original value of the property, the borrower may request in writing that PMI be cancelled.
* Automatic Termination - When the balance of the mortgage reaches 78 percent of the original value of the property, the lender must automatically terminate PMI, provided that payment is current.

For Mortgages Originated Prior to July 29, 1999

Annual Disclosure - The lender must provide an annual written statement detailing the rights of the borrower to cancel PMI should qualifications be met. The lender must also provide an address and phone number that the borrower may use to contact the servicer to determine if PMI may be cancelled. The following are the types of conditions/terms usually imposed on homeowners for mortgages originated prior to 7/29/99, before PMI termination will be considered:

* The mortgage contract usually stipulates when PMI termination will be considered; some lenders will consider it when the homeowner attains 20%, others will not until 30% has been attained- this is why it is most important to read your original contract.
* A request to initiate PMI termination must be in writing.
* Payment history is a very important factor; the lender will not approve a termination request unless payments have been made in a timely manner; even one late or non-payment in ten years is enough to disqualify you, the homeowner.
* Some lenders refuse PMI termination requests based on rising property values (i.e., a new appraisal) because the contract stipulates that ONLY the original appraised value of the property can ever be considered.
* In instances where a new appraisal of the home will be considered, the lender uses an appraiser of its choice and requires the homeowner to pay for the new appraisal.

Not every mortgage type is covered by the law. Generally, Government owned loans, like HUD, FHA, the VA, or the state MHFA program, are not regulated by the Homeowner Protection Act. These programs impose their own requirements for PMI cancellation, if at all. Also, second mortgages are not regulated by the HPA and, hence, do not qualify for PMI termination.
Private Mortgage Insurance | Dropping PMI

If you don’t know if you have PMI, call your mortgage company and ask them. If you do have private mortgage insurance, find out the following:

* How much you are paying for PMI a month
* Do you meet the requirements to get it removed.

Most homeowners don't realize how much money they can save on their mortgage payments each month because of PMI removal. The requirements to remove your private mortgage insurance vary between different mortgage companies, but most will have somewhat similar standards. As a general rule of thumb, there are two major requirements from the mortgage lender:

1. The mortgage loan had to be at least 2 years old.

2. The LTV (Loan To Value) had to be 75% or less.

LTV is Loan To Value and is calculated by dividing your current loan balance by the current market value of the property. The current market value is determined by having an appraisal done. If you believe your house's current market value meets the PMI or Private Mortgage Insurance removal requirements, then you should arrange with your mortgage company to have the real estate appraisal done. Typical investments for an appraisal can run between $300-500, which is definitely a worthwhile investment!
Private Mortgage Insurance |The following are the 5 Steps to eliminating PMI

According to eHow.com, the following are the 5 steps for eliminating PMI

* Step 1- Obtain an amortization schedule for your loan. This information should be in your closing documents. Specifically, check the Truth In Lending statement that was given to you at closing and find when the PMI is scheduled to be dropped.
* Step 2- Call your lender. With the amortization schedule and Truth in Lending information in hand, call your lender and discuss the actual number of payments you must make to get to 80 percent of the original loan. Your target is 80 percent of the original purchase price. Remember that you have to request this, and the lender will grant it only if your loan payment history has been acceptable.
* Step 3- Calculate 80 percent of the original sale price. Check where you are on the amortization schedule and how many payments it will take to get to the 80 percent balance. If you are not close to the 80 percent target, decide on a plan to pay this down faster. For example, you could pay an additional $100 a month, or you could make the equivalent of one additional payment per year.
* Step 4- If you believe the value of you home has increased, tell your lender that you want to provide a new appraisal. One caution: Be sure that the value has increased enough to warrant paying an appraiser's fee. One way to do this is to ask a real estate agent to run a "sold search" in your neighborhood to see how much buyers paid for houses that are similar to yours. Be aware that to drop PMI based on a new appraised value, most lenders will require that you have at least two years of excellent payment history on your home loan.
* Step 5 – Send your lender a packet. Once you have arrived at the 80 percent target, obtain a statement showing your current balance, either from the lender's website or through a request by phone. Send your lender a package containing the following: the current balance statement, a copy of the closing statement from original purchase, copy of the new appraisal, write a cover letter showing which way you arrived at 80 percent (either by appraisal or by paying down the balance) and request that the PMI be dropped, keep a copy of all the documents you submit to your lender, and mail your request package using "return receipt requested" to be certain it is received.

Surprisingly, Lenders aren’t as aggressive or excited about dropping PMI. Therefore, you will want to contact the lender to follow up if you do not receive a response within 30 days.

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