Real Estate NewsThat Pesky Private Mortgage Insurance
Finally, on the vexing subject of Private Mortgage
Insurance, there"s good news, and bad news.
PMI, as we all know, is the mortgage insurance paid for by
a borrower who has made a small down payment, less than the 20
percent that banking regulations regard as safe from the
lender"s point of view. Used with conventional mortgages, it
protects the lender in case of default. (FHA and VA mortgages
carry a different sort of protection for the lender; we"ll
come to that in a moment.)
Over the years, my column has received all sorts of
letters from borrowers who are sure they should be allowed to
drop their PMI.
There are those who don"t understand the term "mortgage
insurance" at all. They"re apt to write indignantly that they
can buy enough life insurance to cover the mortgage debt on
their own, at less cost than "the bank" is charging. I have
to inform them that PMI is not the same as life insurance, and
that it protects the lender, not them, even though they pay
the premiums. And no, if they default they"ll still be
liable, even though the insurance company may reimburse the
lender.
But the most legitimate complaints come from those who say
their equity now far exceeds 20 percent, and they"re not
getting anywhere in trying to drop PMI coverage. Often they
protest that their lender requires them to pay for a new
appraisal, or even two, before considering the request. And
it"s seldom clear whether the 20 percent equity is to be of
current value or original purchase price.
In a few areas, state law addresses the problem. But now,
Uncle has finally stepped in.
Beginning July 29, 1999, PMI can be dropped when equity
reaches 20 percent of original value, if the borrower requests
it. And when equity reaches 22 percent, the lender must drop
the insurance automatically. (That assumes, of course, that
payments are current at that point.)
The bad news is that the new regulations apply only to new
conventional mortgages placed after July 29. But one cheering
note is that lenders will now be required to send annual
notices to both old and new borrowers with cancelable PMI,
explaining just what the qualifications are for dropping the
coverage.
FHA mortgages, of course, carry HUD"s own mortgage
insurance premium (MIP, with an unfortunately confusing
acronym.) How many years it must be carried depends on the
size of the borrower"s original down payment, and the new law
does not apply to FHA loans.
VA loans have no mortgage premium to cancel. They are
guaranteed to the lender by the federal government, at no
extra cost to the veteran.
However complex and delayed in their effect, the new laws
do offer a light at the end of the tunnel. As they might say
on a tv ad -- PMI relief is in sight!
Related Articles:
Why PMI?
PMI Gets Wise to Consumers
Less PMI = Lower Home Costs
What Every First Time Buyer Should Know About PMI