You Can Get Rid of Private Mortgage Insurance (PMI)

Are you saddled with private mortgage insurance (PMI)?  Do you realize it doesn't even benefit you, but only the mortgage company?  If you default, you lose the house, the mortgage company gets their money back.   

Coverage isn't cheap, but it is usually required if you put down less than 20% on your home.  A year's worth of premiums could total one month's mortgage premium or more, and you get no tax benefits by carrying it.  You may even be paying for it when it is no longer necessary.  Many lenders won't even tell you if you no longer need it.  

In July of 1998,  President Clinton signed a new law that went into effect in July 1999, which requires that you be informed in writing when you close on your house that you  have private mortgage insurance, what it is, and how and when you can cancel it.  Once your mortgage is in place, you must get yearly updates about when you can cancel your PMI.

The law also says that you can contact your mortgage holder when you've paid off 20 percent of the original value of the home and ask them to cancel PMI.  Your mortgage holder still has the option of whether to cancel it, but if your payment record is good you shouldn't have a problem.

Are you unsure whether you have met the 20 percent requirement?  The burden in is no longer on you to prove the point. The new law requires that a mortgage holder automatically cancel PMI when you hold 22 percent equity in your house.  The burden is on them and if they do not act in your best interest by canceling the PMI, they are subject to fines, payment of your legal fees, and must refund any premiums paid beyond what you owed.

It is still wise to keep be aware of the equity stake you hold so you can call them on it as quickly as possible. The big difference now is that the teeth in the new law will encourage them to act quickly on your behalf, rather than to delay as long as possible or simply refuse to consider.

The new law applies only to mortgages taken out after July 29, 1999, but Fannie Mae has instituted some additional PMI reforms that apply to all mortgages.  Institutions that service its loans must automatically cancel PMI once the mortgage's midpoint is reached.  This is optional until next January. In January it becomes mandatory.  If you hold a Federal Home Loan Mortgage Corp. (Freddie Mac), you will benefit from this new law as well, because Freddie Mac also will enforce this policy.

Most likely as this policy takes effect, the majority of home mortgage holders will benefit. Twenty percent of mortgages are held by Fannie Mae and Freddie Mac holds 16.7%.  To stay competitive, others in the mortgage lending industry will follow Fannie Mae's lead.  Federal Housing Administration loans will be the major exception.  In the case of FHA loans, the insurance premium is generally added to the loan principal at closing and then paid over the life of the loan.

PMI is good for lenders.  They get default protection for up to 20 to 30 percent of a lost mortgage.  In most situations they can sell the home to recover the rest. The benefit to the purchaser is that it allows lenders to make loans they otherwise would not.  Using PMI, you will frequently qualify for a larger mortgage so you can buy a more expensive home than may otherwise be available to you.

One thing you should be certain not to do is confuse PMI coverage with mortgage life insurance, which pays a beneficiary for all or part of a mortgage if the borrower dies.  PMI only covers the loses of the lender. The lender is considered the at-risk party, so the lender chooses the PMI insurer. There are only eight PMI insurers nationwide and very little premium competition.

Are you paying PMI premiums?  Is your mortgage now less than 80% of your property's value?  If the answer is yes, contact your mortgage company to find out what their process is for removing the PMI requirement.  If they say they have none, it might be worth refinancing to get rid of your PMI.  Review your current payment with PMI versus a new payment without it.  Even if you can't lower your interest, it may make sense.