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Drop PMI
Recent Law Makes It Easier to Drop Private Mortgage Insurance Coverage
Under certain circumstances, a recent Federal law requires mortgage companies to drop private mortgage insurance (PMI) from homeowner's payments. The law applies to loans closed on or after July 29, 1999.
A homeowner may request that PMI be dropped when the mortgage balance reaches 80% of original value. The lender must be satisfied that the property has not dropped in value. Mortgage companies are required to drop PMI when the mortgage balance reaches 78% of the original value of the home.
Why private mortgage insurance?
- First, PMI is involved in conventional loans only, not loans insured through the Federal Housing Administration (FHA) or Veteran's Administration (VA).
- PMI insures the lender against default when the borrower's down payment is less than 20%.
- PMI helps people who have less than 20% available for a down payment. PMI makes it possible to buy a house with as little as 3% down. It is estimated that 40% of borrowers currently use PMI to buy a home with less cash up front.
Are there alternatives to PMI?
Yes! In fact alternatives to PMI can offer significant tax and equity advantages. The "piggyback" loan involves two loans. The first mortgage is the principal loan and can be 75%-80% of the value of the home. The second, or piggyback loan, covers the difference between the first mortgage and your down payment, which is generally 10% but some programs permit as much as 15% on the second mortgage.
Often the total payment for this type of option is the same, or less than a loan using PMI. However, the tax deduction is higher and the piggyback loan typically results in faster payment of principal, which means your equity builds faster. On the other hand, PMI is just a fee and doesn't provide a tax or equity benefit. There are strong arguments for and against PMI. No single answer is right for every borrower.
Basics of the new law
Initial disclosure: For loans applied for on or after July 29, 1999, your lender must provide you a written notification at closing explaining that your mortgage includes private mortgage insurance coverage and that you have the right to cancel it under certain circumstances.
Initiating cancellation on your own: For most loans closed after July 29, 1999, your lender must cancel private mortgage insurance upon receiving your written request when the mortgage balance is 80 percent of the original value of the house. This is not automatic as you must be up to date on all payments and have no other loans on the house, such as an equity line of credit. The lender must also be satisfied that the house has not declined in value. You may have to provide an appraisal.
Automatic termination: Private mortgage insurance will be cancelled automatically for most loans closed after July 29, 1999 when the mortgage balance reaches 78% of the original value of the home. If you are not current on payments, private mortgage insurance won't be cancelled until you become current. An exception is for mortgages defined as high-risk. Private mortgage insurance will automatically be cancelled at the mid-point of a mortgage, e.g. 15 years into a 30-year mortgage.
Sean West Express
19083 Clemans Drive
Castro Valley, CA 94546
Phone 877-272-1546
Fax 510-217-2439
