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Private Mortgage Insurance (PMI) is extra insurance that lenders require from most homebuyers who obtain loans that are more than 80% of their new home's value. In other words, buyers with less than a 20% down payment are normally required to pay PMI. PMI protects the lender if you default on the loan.

The Homeowners Protection Act (HPA) of 1998 established rules for borrower-requested cancellation and automatic termination 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.

Borrower-Requested Cancellation

Under HPA, if you signed for your home mortgage loan on or after July 29, 1999, you have the right to request cancellation of PMI when you pay down your mortgage to the point that it equals 80 percent of the original value of the property. Your lender is not required to accept your request for cancellation if:

• You have a second mortgage
• The property has declined in value
• You had a payment late by 30 days or more within the year preceding the cancellation date, or late by 60 days or more in the year before that.

On a $100,000 loan with 10% 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 life of the loan. Check your annual escrow account statement or call your lender if you want to find out exactly how much PMI is costing you each year.

Automatic Termination

Under HPA, mortgage lenders or servicers must automatically cancel PMI coverage on most loans signed on or after July 29, 1999, once you pay down your mortgage to 78% of the value if you are current on your loan. If the loan is delinquent on the date of automatic termination, the lender must terminate the coverage as soon thereafter as the loan becomes current. Lenders must terminate the coverage within 30 days of cancellation or the automatic termination date, and are not permitted to require PMI premiums after this date. Any unearned premiums must be returned to you within 45 days of the cancellation or termination date.

For high risk loans, mortgage lenders or servicers are required to automatically cancel PMI coverage once the mortgage is paid down to 77% of the original value of the property, provided you are current on your loan.

Additional Protections

The federal law also provides that lenders or servicers must provide certain disclosures concerning PMI for loans secured by the consumer's primary residence obtained on or after July 29, 1999. The HPA also contains disclosure provisions for mortgage loans that closed before July 29, 1999.

Loans Obtained on or after July 29, 1999

For loans obtained on or after July 29, 1999, the HPA establishes three different times when a lender or servicer must notify a consumer of his or her rights. Those times are at loan closing, annually and upon cancellation or termination of PMI.

At loan closing, lenders are required to disclose all of the following to borrowers:

• The right to request cancellation of PMI and the date on which this request may be made
• The requirement that PMI be automatically terminated and the date on which this will occur
• Any exemptions to the right to cancellation or automatic termination
• A written initial amortization schedule (fixed-rate loans only)

Annually, mortgage loan servicers must send borrowers a written statement that discloses:

• The right to cancel or terminate PMI
• An address and telephone number to contact the loan servicer to determine when PMI may be canceled

When the PMI coverage is canceled or terminated, a notification must be sent to the consumer stating that:

• PMI has been terminated, and the borrower no longer has PMI coverage
• No further PMI premiums are due
• The obligation for providing notice of cancellation or termination is with the servicer of the mortgage

Loans Obtained before July 29, 1999

An annual statement must be sent to consumers whose mortgages were obtained before July 29, 1999. This statement should explain that under certain circumstances PMI may be canceled (such as with consent of the mortgagee). It should also provide an address and telephone number to contact the loan servicer to determine whether PMI may be canceled.

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, may also 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. Although parts of HPA apply only to loans obtained on or after July 29, 1999, many lenders may follow the HPA's requirements for both new and existing loans. Making a call to your mortgage loan servicer will help you understand exactly how the law applies to you and your mortgage.

Questions for Your Attorney

• Are there programs for paying PMI up front or ways to avoid paying PMI altogether?
• What if my lender didn't mention PMI at all during my loan closing last month?
• Are there laws in my state that regulate PMI?

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