Private Mortgage Insurance (PMI)
What is PMI?
PMI is insurance lenders require from most home buyers
who need loans which are more than 80 percent of their
new homes value. In other words, borrowers with
less than 20 percent down would normally need PMI unless
they were to use a first and second loan combination
known as 80/20, 80/15, 80/10 or any combination of the
two loans.
Benefits of PMI
PMI benefits lenders by giving them added protection
against defaults on riskier loans and by giving buyers the
ability to obtain financing with a much smaller down payment
than would otherwise be possible.
New Federal Law on PMI
Requirements
The Homeowners Protection Act (HPA) sets new rules making
it easier for homeowners to cancel private mortgage
insurance (PMI) on primary residence loans secured by a
borrower's principal residence. It applies to loans
that closed on or after July 29, 1999. The new law
makes dropping the PMI just as much the lender's
responsibility as the homeowner's.
What Loans Are Covered?
The new HPA law does not cover VA or FHA guaranteed
loans. Neither does it cover high-risk loans.
The HPA does not give guidance as to what should be
considered high-risk, leaving those requirements up to
Fannie Mae and Freddie Mac.
How Do You remove or Terminate
PMI?
Under the new HPA law in order to cancel your PMI you
need to pay the balance down to 80% of the original purchase
price. You also need to have a good payment history
with no 30 days late in the previous year or 60 days late in
the previous two years. If you have a second mortgage
or your home is worth less than what you originally bought
it for, expect to have some additional requirements.
Remember the new law still does not require lenders to
remove PMI based on "current property value" all figures
must be on original purchase price or original appraisal.