Mortgage Insurance Law
Hits the Brakes on
"Auto-Pilot Bill Paying
Mortgage Insurance Law
Hits the Brakes on
"Auto-Pilot Bill Paying
by Andy Jacob, President
World Wide Financial Services
One
million families or individuals are assisted into homeownership each year
through private mortgage insurance (PMI). The majority of these policies
are terminated once the borrower pays in a fair amount of equity. However,
if you've never requested the cancellation of your PMI policy: if you haven't
even thought to request cancellation; or if you've been paying PMI so long
that you don't remember what it's for, then familiarity with "The Homeowners
Protection Act" may save you and thousands of other American homeowners
money every month.
"The
Homeowners Protection Act"to become active on July 29, 1999addresses
the overpayment of PMI. Here's how this legislation will affect you upon
enactment and what you can start doing now to better manage your PMI policy.
PMI and
"The Homeowners Protection Act" Defined
Private
mortgage insurance (PMI), paid by the borrower, protects lenders from mortgage
default risk in cases where the borrower has put less than 20 percent down
payment on a home. The average cost of an American home is $165,000. As
most Americans don't have $33,000 (20 percent of the home's value) in their
back pockets for a down payment, PMI agencies allow more Americans to enjoy
homeownership by enabling lenders to provide loans which would otherwise
be risky.
The
greatest change to be brought on by "The Homeowners Protection Act"
is its mandate that PMI agencies must automatically terminate a policy once
the loan balance declines to 78 percent of the original property value.
This could save a homeowner anywhere from $60 to just over $100 a monththe
average cost of PMIdepending on the loan.
Origins of the Legislation
While
PMI allows more people to own homes, the need for reform was spurred by
the routine overpayment of private mortgage insurance by homeowners. Take
the example of the average American house costing $165,000. If a borrower
had made a 5 percent down payment of $8,250 and had a monthly mortgage payment
of $1,096.02 (at a 7.5 percent rate), he would pay the balance down to 80
percent of the home's original value after 11 years, but may unwittingly
continue paying his private mortgage insurance, which would likely cost
around $101.89 a month.
Paying
PMI can sometimes become as routine as making mortgage or utility payments.
The borrower is paying monthly invoices on "auto pilot", without
considering the cancellation of the policy. In some cases, this overpayment
can go on even after the homeowner has paid their balance down to 75 percent
or less.
"Mortgage
insurance has helped expand homeownership by allowing homeowners to make
lower down-payments," said Clinton in a public statement. "But
far too many homeowners continue to pay for mortgage insurance long after
they have built enough equity so that the lender has little risk of loss."
Who "The Homeowners Protection Act" Will Affect
According
to a report by former Senator Alfonse M. D'Amato, a sponsor of the original
bill, it is estimated that 40 percent of new homeowners purchase private
mortgage insurance. Of these 40 percent, many pay their balances down to
80 to 75 percent, refinance their mortgages or sell their homes, which often
frees them from PMI. As many as half of these new homeowners, however, are
estimated to be overpaying on their private mortgage insurance.
If
you've been a long-time resident of your current home, have paid PMI throughout
the history of your home, haven't refinanced your mortgage and have a good
payment history, you may be a candidate for policy termination. Contact
your PMI provider ask if you've paid your balance down to 80 percent or
less.
Actions for the Interim
While
the legislation is not effective until a year from its signing into law,
consumers should use attention on the subject to their advantage. Become
knowledgeable on private mortgage insurance and follow what lenders refer
to as an amortization schedule which tracks your payments, balance and PMI
costs.
If
your balance is approaching 80 percent, speak with your PMI provider about
when you qualify for cancellation. If you are looking into a mortgage, speak
to your lender not just about mortgage rates, but also PMI costs. Not all
PMI policies are the same. Arming yourself with information and conveying
to lenders and PMI agencies that you are informed may save you from the
financial crash associated with paying bills on "auto pilot".
Editor's Note: Andy Jacob is president and co-founder of World Wide Financial,
a mortgage lender with 280 employees, offices throughout the Midwest, East
Coast and South, and market shares in 40 states. World Wide Financial has
provided over $4 billion in property-secured loans. For more information,
please call 1-800-807-9377 or visit www.worldwidefinancial.com on the Internet.
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