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If you are a homeowner, you will want to be
aware of a new law that establishes
rights for homeowners and rules for lenders
regarding private mortgage insurance (PMI) cancellation. With this knowledge, you may
eliminate premiums you may be paying
unnecessarily. What
is Private Mortgage Insurance (PMI)
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.
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Canceling PMI
: Once the principal is reduced to 80% of value, the LMI is no
longer required. This can occur via the principal being paid down,
home value appreciation, or both. Under HPA (Homeowner's
Protection Act of 1998), 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. |
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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. Note: HPA applies only to people who bought their
homes after July 29, 1999 |
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.
Tax Deductible: Mortgage insurance
premiums were not tax deductible until 2007. * Consult your tax
advisor. Limitations apply.
Increase in Value of Property: Most of your mortgage payments
during the first few years of your loan are finance charges. 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 have risen, your property
value may have increased so that you may be at the 80 percent mark
today. Your property value could also increase due to home
improvements that you make to your home such as a new room, siding
etc.
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 (appraisal, comparable home sales,
tax assessment etc) indicating the higher property value.
CONTACT YOUR LENDER BY PHONE AND IN WRITING FOR THEIR PROCEDURES TO
CANCEL PMI. Over time, this is a big expense.
NOTE: You may also want to look at your total loans costs at this time if
you have done so and if the rates and terms are right, consider
refinancing your existing loan for even greater savings.
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