Private Mortgage Insurance (PMI). PMI is a supplemental policy that protects the lender if the borrower defaults on the loan.

Over the past few years it has become increasingly more common to see home buyers using down payments of less than 20 percent. This high "loan-to-value" ratio presents the lenders with a potentially large risk. To offset this risk, a supplemental policy known as Private Mortgage Insurance (PMI) is often added to protect the lender in case a borrower defaults on the loan.

PMI can be a large money-maker for the mortgage lenders. The amount of the insurance, often well over $100 per month, is commonly rolled into the mortgage payment and often overlooked by the homeowner.

Until recently, lenders were under no obligation to tell a home owner when they had reached a point where the PMI can be dropped. In most cases, a law now obligates lenders to terminate the PMI when the principal balance of the loan reaches 78 percent of the original loan amount. (* for more information, Refer to Federal Trade Commission article below)

Since many areas of the United States have seen recent significant gains in the value of real estate, it is quite possible that their mortgage balance is well under the 78 percent of the home's current market value. This makes it sometimes possible to have your lender drop the PMI portion of your monthly mortgage payment and could result in thousands of dollars saved over the course of a conventional 30 year loan.

It is important to note that this law only applies to home loans - whether first time or refinances - that closed after July, 1999. Also certain other conditions must be met, such as being current on the loan payments. Buyers that purchased before July 1999 can also have their PMI removed, but they must initiate the process and though the lender is under no obligation to do so, most will.

The hardest thing for most home owners to know is just when does their home equity rise above this magical 20 percent point? A state certified and licensed real estate appraiser can certainly help. Our office offers specific services to help customers find the market value of their home to help the home owner possibly remove any PMI payments. Many mortgage companies will often eliminate the PMI portion of the payment with an approved appraisal report. The savings from dropping the PMI could pay for the appraisal in a matter of months.

(*) Article reprinted from the FEDERAL TRADE COMMISSION, CONSUMER ALERT)

If you put less than 20 percent down on a home mortgage, lenders often require you to have Private Mortgage Insurance (PMI). PMI protects the lender if you default on the loan. The Homeowners Protection Act of 1998 - which became effective in 1999 - establishes rules for automatic termination and borrower cancellation of PMI on home mortgages. These protections apply to certain home mortgages signed on or after July 29, 1999 for the purchase, initial construction, or refinance of a single-family home. These protections do not apply to government-insured FHA or VA loans or to loans with lender-paid PMI.

For home mortgages signed on or after July 29, 1999, your PMI must - with certain exceptions - be terminated automatically when you reach 22 percent equity in your home based on the original property value, if your mortgage payments are current. Your PMI also can be canceled, when you request - with certain exceptions - when you reach 20 percent equity in your home based on the original property value, if your mortgage payments are current.

One exception is if your loan is "high-risk." Another is if you have not been current on your payments within the year prior to the time for termination or cancellation. A third is if you have other liens on your property. For these loans, your PMI may continue. Ask your lender or mortgage servicer (a company that collects your payments) for more information about these requirements.

If you signed your mortgage before July 29, 1999, you can ask to have the PMI canceled once you exceed 20 percent equity in your home. But federal law does not require your lender or mortgage servicer to cancel the insurance.

On a $100,000 loan with 10 percent down ($10,000), PMI might cost you $40 a month. If you can cancel the PMI, you can save $480 a year and many thousands of dollars over the loan. Check your annual escrow account statement or call your lender to find out exactly how much PMI is costing you each year.

Additional provisions in the law

New borrowers covered by the law must be told - at closing and once a year - about PMI termination and cancellation.
Mortgage servicers must provide a telephone number for all their mortgage borrowers to call for information about termination and cancellation of PMI.
Even though the law's termination and cancellation rights do not cover loans that were signed before July 29, 1999, or loans with lender-paid PMI signed on any date, lenders or mortgage servicers must tell borrowers about the termination or cancellation rights they may otherwise have under those loans (such as rights established by the contract or state law).

Next Steps
Some states may have laws that apply to early termination or cancellation of PMI - even if you signed your mortgage before July 29, 1999. Call your state consumer protection agency for more information about your state's rules. Fannie Mae and Freddie Mac, which buy home mortgages from lenders, also may have guidelines affecting termination or cancellation of PMI on home mortgages signed before July 29, 1999. Check with your lender or mortgage servicer, or call Fannie Mae or Freddie Mac, for more information.
Contact your lender or mortgage servicer to learn whether you're paying PMI. If you are, ask how and when it can be terminated or canceled.
Contact the FTC for More Information at www.ftc.gov, or 1-877-382-4357
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