Questions and Answers on Private Mortgage Insurance and the Federal
Homeowner Protection Act of 1998
What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) 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.
The Homeowner Protection Act of 1998
This federal law, Public Law 105-216, effective as of July 29, 1999,
requires automatic cancellation and notice of cancellation rights with
respect to PMI, anytime it is required as a condition for entering into
a residential mortgage contract transaction. This information must be
sent using either the IRS' Form 1098 (Mortgage Interest Statement) or
in the lender's annual escrow account disclosure statement on a standardized
(the lending industry's or the lender's own) form.
How the Law Works
The Homeowner Protection Act is designed to remove confusion in the private
mortgage insurance (PMI) cancellation process. In summary, 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.
Mortgages not covered by the new law
- Government-owned loans, such as those by federal 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.
- Second mortgages are also not regulated by the Homeowner Protection
Act and, hence, do not qualify for PMI termination.
Why do I need PMI?
Studies have shown that homeowners with less than 20 percent invested
in a home are more likely to default on their loans, making low down payment
mortgages risky to lenders. Lenders require PMI on low down payment mortgages
to reduce their risk should the borrower default on the loan.How Does
PMI Help Me?
Private mortgage insurance makes it possible to buy a home sooner because
you don't have to put down as much money up front.
- First time buyers benefit because they do not have to save as much
money to buy that first home.
- If you are trading up, PMI allows you to consider homes in a wider
price range.
- Whether you are buying your first home or moving to another, you can
make a smaller down payment and keep more of your savings for other
uses.
Does PMI Offer Any Tax Advantages?
The larger loan possible with PMI boosts your tax deductions for mortgage
interest.How much does it cost?
Premiums vary. They are determined by the size of the down payment, the
type of mortgage and amount of insurance. Premiums are typically included
in your monthly mortgage payment. The average range for a $100,000 loan
is $25 to $65 per month. Different payment schedules are available. Contact
your lender to discuss your options.
How to terminate your PMI
1. Pay down your mortgage
If the current balance of your mortgage is less than 80% of the original
purchase price of your property and your mortgage was originated prior
to 7/29/99, it is possible you may no longer be required to continue paying
PMI. Contact your lender for more information. If it was originated after
7/29/99, it must automatically terminate when your balance reaches 78%
of the original value of your home. You may also initiate termination,
in writing, when your balance reaches 80% of the original value.
2. Increase the value of your property
If the value of your property has increased, due to home improvement
or market conditions, you may no longer be required to pay PMI. If the
current balance of your mortgage is less than 80% of the current value
of your property, your lender may allow you to terminate PMI. Most lenders
will require an appraisal (at cost to you). For example, a homeowner who
owes $160,000 on a $200,000 home still owes 80% of the home's value. But
if that home's value has grown to $400,000, the debt now represents only
40% of the home's value. Contact your lender for more information.
Recent federal data has shown that the average home value in Massachusetts
increased 7.9% in the past year alone. Now might be a good time to see
if you qualify to cancel your PMI.
Where to call for enforcement
For loans obtained through a depository lender insured by the Federal Deposit Insurance Corporation, the FDIC shall enforce the requirements of this statute. Contact the FDIC’s Boston regional office at:
Division of Compliance and Consumer Affairs
15 Braintree Hill Office Park
Braintree, MA 02184
(781) 794-5500
www.fdic.gov
For loans obtained through a non-FDIC-insured THRIFT depository lender, contact the Office of Thrift
Supervision’s Northeast office at:
10 Exchange Place, 18th floor
Jersey City, NJ 07302
(201) 413-1000
www.ots.treas.gov
For a loan owned by a credit union, contact the National Credit Union Administration’s regional office at:
Region One Office
9 Washington Square, Washington Avenue Extension
Albany, NY 12205
(518) 862-7400
www.ncua.gov
To obtain a copy of the federal statute visit the federal government’s website where this public law (P.L. 105-216) is posted:
www.access.gpo.gov
For other helpful consumer information on banking issues, contact:
Federal Reserve Bank of Boston
600 Atlantic Avenue
Boston, MA 02106
(617) 973-FIND (3463)
www.bos.frb.org
Consult your lender for more information
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