Have 20% Equity
In Your Home?
Cancel PMI Insurance
by Robert K. Heady
Bank Rate Monitor
Its
initials are PMI, standing for private mortgage insurance. Lots of people
don't understand it, don't know how it works, and confuse it with other
types of home insurance that don't have a darned thing to do with PMI.
Yet,
until recently, those same homeowners were having their pockets picked by
mortgage lenders who kept socking them with the cost of PMI when the borrower
could have easily yelled "Stop!"
In
a nutshell, PMI is insurance that only protects the mortgage outfit in case
you ever default on your payments. The lendernot youselects the insurance
company and arranges the whole procedure. You don't even get to see the
PMI policy. You simply must pay the cost, which becomes part of your monthly
mortgage payment, of $25 to $65 a month per each $100,000 you borrow.
There
are only eight PMI insurers available nationwide, but they account for big
numbers. Last year, about 1.5 million of the nation's 4.97 million home
buyers were saddled with private mortgage insurance, while the dollar amount
of mortgages covered by PMI doubled to $559 billion between 1992 and '98,
according to insure.com.
Generally,
borrowers must purchase PMI if their down payment is less than 20 percent
of the value of the home. The upside is that millions of consumers in recent
years have been able to put down only 5 percent or 10 percent to get into
a more expensive home than they otherwise could affordall because lenders
were able to cover their hides with private mortgage insurance.
In
particular, that's helped first-time home buyers and young families. The
downside has been that the monthly PMI expense, stretched out over one year,
can be the equivalent of making a 13th month of mortgage paymentsbut without
enjoying the tax benefits you get from the actual mortgage.
The
worse part of the story? Even after a home buyer had increased his or her
equity in the house to 20 percent or more, many lenders used to still keep
collecting PMI payments. If the homeowner didn't bug his or her lender to
cancel PMI, the lender quietly kept taking their money.
The
picture has just changed. The new Federal Private Mortgage Insurance Act,
which became effective July 29, says that when you've paid off 20 percent
of the original value of the house, you can ask the lender to cancel PMI.
When you hit 22 percent, they must automatically cancel it.
And now,
when you close on a house, the lender must inform you of when you'll probably
be eligible to get rid of PMI. The lender also must notify you annually
of where you stand with the insurance and how to go about canceling it if
you're at the magic 20 percent level.Here's
what to do:1)
Write to the mortgage servicer to which you've been sending your mortgage
payments. It may not be the same company that originally granted you the
loan.2)
Ask them to send you, in writing, when they expect you to reach 20 percent
equity. Request them to spell out the criteria you must meet to cancel PMI.
The lender will probably ask that you validate (on your nickel), through
a third party such as an appraiser, that the real estate values in your
area haven't declined since you took the loan out. They'll also check to
see if you've missed any loan payments in the past 12 months, since chronically
late payers have less chance of being able to cancel PMI.3)
If you've prepaid a year's worth of PMI, as some do, you may be due a refund.There
have been horror stories about anguished homeowners running into foot-dragging
lenders, but with the spotlight suddenly focused on the new federal law,
you should be able to get speedy results. Lenders who don't obey the law
could get fined.Loans
that were obtained prior to July 29, and sold to the two main quasigovernment
agencies, Fannie Mae or Freddie Mac, have many of the same provisions of
the new PMI law. Check with your mortgage holder to see if any of them apply
to you. You may stop paying PMI on a Fannie Mae or Freddie Mac loan only
when you've reached the midpoint of the term of your mortgage. For example,
on a 30-year loan, after you've reached 15 years you're eligible to cancel
PMI.FHA
government insurance mortgage programs are not affected by the new law.Above
all, don't confuse PMI with any other type of insurance such as mortgage
life, or home insurance, which covers your property losses in the event
of a disaster such as a fire.Editor's
Note: Robert K. Heady is the founding
publisher of Bank Rate Monitor and is the co-author of the book, The
Complete Idiot's Guide to Managing Your Money. E-mail to jrnl8888@aol.com.