kiss PMI goodbye?
New law helps -- a little
homeowners overpay millions of dollars a year in unnecessary private
Thanks to the Homeowners Protection Act, which
goes into effect today, American homeowners will continue to overpay
millions of dollars a year.
The law establishes when homeowners stuck with
the insurance, called PMI, can get rid of it. Borrowers can request
that PMI be canceled when they pay down the principal balance of
their mortgage loans to 80 percent of the purchase price. Lenders
must automatically cancel PMI when the balance hits 78 percent.
But the act has substantial holes in it:
- It only applies to new mortgages, signed
on or after July 29.
- It ignores how the appreciation in value
adds to equity, which ought to make PMI disappear sooner.
- It does, however, protect lenders from having
to cancel PMI if a home goes down in value.
So the bottom line for homeowners and home
buyers, then, is the same today as it was yesterday: Stay on the
ball, watch the value of your home and ask your lenders to drop
PMI as soon as you can. If your home appreciates in value, you could
be paying too much for years before the protections of the new federal
law kick in.
PMI is the friend of homeowners who are caught short on their
down payments for conventional mortgages. Borrowers who can't afford
at least 20 percent down have to get PMI to get their mortgages.
The borrower pays it, but the lender gets the benefit -- PMI assures
the lenders will get back their money if the borrower defaults.
People who don't have a big stake in their homes are considered
a higher risk; PMI is a policy that persuades lenders to take that
About 1.5 million of the 4.97 million home buyers
in 1998 were saddled with PMI policies.
|New PMI Law: the
right to cancel
Borrowers may request that PMI be canceled when:
The mortgage balance reaches 80 percent
of the original value of the property, based on the initial
amortization schedule. At that point, the borrower has
20 percent equity in the home.
Homeowners must have a good payment history
and have no other loans taken out on the home. They also
must be prepared to show that the house has not declined
Lenders must cancel a borrower's private
mortgage insurance when:
right to be informed
For all new loans issued on or after July
29 with private mortgage insurance, lenders must:
For all loans with PMI, regardless of when
they were issued, the law requires that lenders:
They're not cheap. Under the current rates from
one large company, PMI costs about $39 a month for someone who puts
down 10 percent on a $100,000 home; $62 a month at 5 percent down.
The coverage is supposed to expire when the
borrower surpasses 20 percent equity -- just like the homeowner
who put 20 percent down, a homeowner with a 20 percent equity stake
in a property is considered a good enough risk to do without the
But PMI is often a friend that stays around
Early payments on an amortized loan are mostly
interest, so it takes years before home buyers pay down their mortgages
to 80 percent of the purchase price. It takes 10 years, two months
with a 10 percent down loan, and 12 years, four months with a 5
percent down loan, based on a 30-year, fixed-rate mortgage taken
out at 7.56 percent, the Bankrate.com national average for
But even after that point, because homeowners
didn't always ask for the coverage to be dropped and lenders didn't
tell them they could be, unwitting consumers are often socked with
extra PMI payments for years.
Protection Act of 1998 was passed to make sure PMI went away,
and establishes when. The law covers mortgages originated July 29,
1999, and later.
The act adds extensive disclosure requirements
to demystify PMI. It requires lenders to offer borrowers an initial
written notice stating that PMI is required, and that it can be
canceled at a later date. Lenders also must follow up with annual
disclosure statements reminding borrowers of their right to cancel
PMI. The annual disclosure requirement is the one section of the
law that applies to all mortgages with cancelable PMI; the rest
of the law just applies to mortgages issued today and afterward.
Lenders will also be required to refund all
"unearned" PMI premiums. They will have 45 days after insurance
terminates to repay any premiums they collected from borrowers for
coverage beyond the date the insurance should have ended. The law
leaves it up to individuals to sue for damages if lenders fail to
"The bottom line is that thousands of hardworking
American homeowners overpay PMI each year because they don't know
what it is or how to get rid of it," said Rep. James V. Hansen,
R-Utah. He crafted the law when he had trouble getting rid of the
PMI policy on his own property. "We would not let an auto mechanic
charge customers for work that is not needed or a doctor charge
patients for procedures that were not performed."
However, in the compromise of lawmaking, the law was set to
apply only to future mortgages. It also is drawn carefully to protect
lenders from having to drop PMI if homes depreciate in value. It
does not, however, let consumers get rid of PMI faster if homes
appreciate in value, increasing their equity. The language of the
law requires that borrowers pay down the balance of the mortgage
to reach "80 percent of the original value of the property" before
they can ask that PMI be dropped. The law also defines the original
value as the lesser of the purchase price, or the appraised value
at the time of purchase.
The difference between the original value and
current value is an important one: Every dollar of real estate appreciation
after purchase is a dollar of equity that goes on the homeowner's
side of the balance sheet.
Someone with a home originally worth $150,000,
for example, who enjoyed appreciation of 4 percent a year would
have a home worth more than $180,000 in just five years. That appreciation
alone is enough to give that homeowner 20 percent equity, even if
it was bought with no down payment at all.
Under the law, however, that lender who gave
a 0 percent down, $150,000 mortgage, wouldn't have to drop PMI until
14 years and three months had passed, sticking the homeowner with
more than nine years of unnecessary payments.
So what's a savvy homeowner to do? Stay on top
of the property values in your neighborhood and contact your lender
to ask about its policies toward PMI. Many lenders will offer to
drop the PMI policy when asked, although they may first require
you to pay for an appraisal to show you have reached 20 percent
Several other factors enter into it -- among
them, existing state laws, your payment history, compliance deadlines,
the fine print in the mortgage -- so borrowers should go ahead and
request PMI cancellation if they think they might be eligible.
That holds especially true for people who have
made extra mortgage payments to lower their principal balance and
people who find out home values are appreciating in their area.
Either a rise in home values or a fall in principal balance adds
to equity and draws the 20 percent PMI finish line closer.