What You Need to Know About Private Mortgage Insurance (PMI)?

Private Mortgage Insurance Companies (MICs) provide mortgage insurance for residential conventional mortgage loans, making these loans more attractive in the secondary mortgage market. Private mortgage insurance enables residential borrowers to obtain loans with higher loan-to-value ratios and to purchase homes with smaller down payments. Private mortgage insurance is typically required when loan-to-value ratios exceed 80% in connection with residential mortgage loans. This concept was advanced in the 1960s with the first firm to offer such coverage being Mortgage Guaranty Insurance Corporation (MGIC). Private mortgage insurance reduces the monetary risk of loss to originating lenders and to subsequent investors. MICs have underwriting standards that conventional lenders must meet to qualify for insurance coverage. MIC insured loans are typically more saleable in the secondary market.

The Mortgage Market

The following characteristics make the United States attractive to suppliers of mortgage money from foreign and domestic investors:

1. High demand for mortgage money;

2. A large, and usually growing population;

3. Traditionally wide diversification of industry;

4. Historically high employment and prosperity;

5. Large depository institutions maintaining facilities or branches:

6. Experienced and highly efficient mortgage loan correspondents (mortgage bankers);

7. Common usage of title insurance companies and public escrows rather than settlements;

8. Predominant use of trust deeds with the power of sale rather than mortgages with or without the power of sale as security instruments;

9. The existence of licensed mortgage brokers that package mortgages for funding by authorized lenders and for subsequent sale to investors in the secondary market.

What If Your Home Value Has Increased?

When making mortgage payments, most of the payments during the first few years are finance charges. Therefore, it can take 10 to 15 years to pay down a loan to reach 80 per cent of the loan value. If the home prices in your area are rising quickly, your property value may increase so that you can reach the 80 per cent mark a lot faster. Your property value could also increase due to home improvements that you make to your home.

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 to demonstrate the higher property value.

Cancellation of Private Mortgage Insurance: Federal Law May Save You Hundreds of Dollars Each Year

If you put less than 20 per cent down on a home mortgage, lenders often require you to have Private Mortgage Insurance (PMI). PMI protects the lender if you default on the loan. The Homeowners Protection Act of 1998 - which became effective in 1999 - establishes rules for automatic termination and borrower cancellation of PMI on home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999, for the purchase, initial construction, or refinance of a single-family home. These protections do not apply to government-insured FHA or VA loans or to loans with lender-paid PMI.

For home mortgages signed on or after July 29, 1999, your PMI must - with certain exceptions - be terminated automatically when you reach 22 per cent equity in your home based on the original property value, if your mortgage payments are current. Your PMI also can be cancelled, when you request - with certain exceptions - when you reach 20 per cent equity in your home based on the original property value if your mortgage payments are current.

One exception is if your loan is "high-risk." Another is if you have not been current on your payments within the year prior to the time for termination or cancellation. A third is if you have other liens on your property. For these loans, your PMI may continue. Ask your lender or mortgage servicer (a company that collects your payments) for more information about these requirements.

If you signed your mortgage before July 29, 1999, you can ask to have the PMI canceled once you exceed 20 percent equity in your home. But federal law does not require your lender or mortgage servicer to cancel the insurance.

On a $100,000 loan with 10 percent down ($10,000), PMI might cost you $40 a month. If you can cancel the PMI, you can save $480 a year and many thousands of dollars over the loan. Check your annual escrow account statement or call your lender to find out exactly how much PMI is costing you each year.

Additional provisions in the law

New borrowers covered by the law must be told - at closing and once a year - about PMI termination and cancellation.

Mortgage servicers must provide a telephone number for all their mortgage borrowers to call for information about the termination and cancellation of PMI.

Even though the law's termination and cancellation rights do not cover loans that were signed before July 29, 1999, or loans with lender-paid PMI signed on any date, lenders or mortgage servicers must tell borrowers about the termination or cancellation rights they may otherwise have under those loans (such as rights established by the contract or state law).

Next Steps

Some states may have laws that apply to early termination or cancellation of PMI - even if you signed your mortgage before July 29, 1999. Call your state consumer protection agency for more information about your state's rules. Fannie Mae and Freddie Mac, which buy home mortgages from lenders, also may have guidelines affecting termination or cancellation of PMI on home mortgages signed before July 29, 1999. Check with your lender or mortgage servicer, or call Fannie Mae or Freddie Mac, for more information.

Contact your lender or mortgage servicer to learn whether you're paying PMI. If you are, ask how and when it can be terminated or cancelled.

For More Information

The FTC works to prevent fraudulent, deceptive and unfair business practices in the marketplace and to provide information to help consumers spot, stop and avoid them. To file a complaint or get free information on consumer issues, visit ftc.gov or call toll-free, 1-877-FTC-HELP (1-877-382-4357); TTY: 1-866-653-4261. Watch a new video, How to File a Complaint, at ftc.gov/video to learn more. The FTC enters consumer complaints into the Consumer Sentinel Network, a secure online database and investigative tool used by hundreds of civil and criminal law enforcement agencies in the U.S. and abroad.