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  Mortgage InsuranceThursday, April 25th, 2024  

When it comes to home ownership, most people will place their mortgage payment before any other financial obligation. What about the mortgage insurance that you pay with your principal and interest payments? Is it neccessary? Is this an expense that can be cut from your family budget?

Most mortgage lenders require an insurance policy be in force for mortgages where the down payment is less than 20% of the house cost or assessed value, whichever is lower. Private Mortgage Insurance (PMI) guarantees the lender full payment if you default for any reason on your mortgage. The main benefit for home buyers is it allows the bank or mortgage company to accept a smaller down payment without worrying that they could be stuck with a house they can't sell for what is owed. The interest rate you are charged will also be lower with this protection for the lender. PMI is for consumers that do not meet the requirements for a VA or FHA guaranteed loan.

The Homeowner's Protection Act (HPA) of 1998, requires lenders to provide information to you on PMI. The lender must tell you of your rights at the closing, annually, and upon cancellation or termination of PMI. At closing the lender will give you a statement showing your right to cancel and when, the automatic cancellation requirement, reasons the lender can refuse cancellation, and an amortization table showing dates and remaining balances until the payoff date. Each year, the lender must also inform you of your rights and who to contact for information.

Until this act was passed, the lender was under no obligation to tell you when PMI was no longer needed. The banks would only drop PMI if you requested the bank to drop it. Many homeowners found themselves paying for unneeded insurance for years. Now, the homeowner can request from the lender the date the remaining mortgage equals 80 percent of the original purchase price or appraised value to know when to request cancellation. The bank will not grant this request if you have been 30 days late in any payment in the last year or 60 days late in the past two years. The home must also have at least maintained its value and not have a second mortgage (equity loan) against it. The Homeowners Protection Act also directs the mortgage lender to automatically cancel PMI, once you pay down your mortgage to 78 percent of the value. Again you must be current in your payments. Any unearned premiums must be returned to you within 45 days of the cancellation or automatic termination date. If for some reason the PMI was not cancelled because of an equity loan or repeated late payments, then the PMI must be cancelled when the mortgage is half paid off. Thus after 15 years of a 30 year mortgage the PMI must be cancelled by the bank if you are current in payments.

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