William Francis Galvin
Secretary of the Commonwealth
updated 05/07
Private Mortgage Insurance
and the Federal Homeowner
Protection Act of 1998
Questions
Answers
and
William Francis Galvin
Secretary of the Commonwealth
Citizen Information Service
One Ashburton Place, Room 1611
Boston, MA 02108
Telephone: (617) 727-7030
Toll-free: 1-800-392-6090 (in Mass. only)
TTY: (617) 878-3889
Email: [email protected]
Website: www.sec.state.ma.us/cis
Private Mortgage Insurance • 1
What Is Private Mortgage Insurance?
Private mortgage insurance (PMI) is insurance against the non-
payment of, or default on, an individual mortgage or loan involved in
a residential mortgage transaction. It protects a lender against loss if a
borrower stops making mortgage payments. It also makes it possible
for you to buy a home with as little as a 3-5 percent down payment.
The Homeowner Protection Act of 1998
is federal law, Public Law 105-216, eective as of July 29, 1999,
requires automatic cancellation and notice of cancellation rights with
respect to PMI, anytime it is required as a condition for entering into
a residential mortgage contract transaction. is information must be
sent using either the IRS’ Form 1098 (Mortgage Interest Statement)
or in the lender’s annual escrow account disclosure statement on a
standardized (the lending industry’s or the lender’s own) form.
How the Law Works
e Homeowner Protection Act is designed to remove confusion in the
private mortgage insurance (PMI) cancellation process. In summary,
the law provides:
For Mortgages Originated On or After July 29, 1999
Mandatory Initial Disclosure - At the time the transaction is
consummated, the lender must provide written notice of when PMI
may be cancelled based on payment schedule (for a xed rate mortgage)
or that the lender will notify the customer when the cancellation date
is reached (for an adjustable rate mortgage).
Borrower-Initiated Cancellation - When the balance of the mortgage
reaches 80 percent of the original value of the property, the borrower
may request in writing that PMI be cancelled.
Automatic Termination - When the balance of the mortgage reaches
2 • Private Mortgage Insurance
78 percent of the original value of the property, the lender must
automatically terminate PMI, provided that payment is current.
For Mortgages Originated Prior to July 29, 1999
Annual Disclosure - e lender must provide an annual written
statement detailing the rights of the borrower to cancel PMI should
qualications be met. e lender must also provide an address and
phone number that the borrower may use to contact the servicer to
determine if PMI may be cancelled.
e following are the types of conditions/terms usually imposed on
homeowners for mortgages originated prior to 7/29/99, before PMI
termination will be considered:
• The mortgage contract usually stipulates when PMI
termination will be considered; some lenders will consider
it when the homeowner attains 20%, others will not until
30% has been attained– this is why it is most important to
read your original contract.
• A request to initiate PMI termination must be in writing.
• Payment history is a very important factor; the lender will
not approve a termination request unless payments have been
made in a timely manner; even one late or non-payment in
ten years is enough to disqualify you, the homeowner.
• Some lenders refuse PMI termination requests based on rising
property values (i.e., a new appraisal) because the contract
stipulates that ONLY the original appraised value of the
property can ever be considered.
• In instances where a new appraisal of the home will be
considered, the lender uses an appraiser of its choice and
requires the homeowner to pay for the new appraisal.
Private Mortgage Insurance • 3
Mortgages not covered by the new law
• Government-owned loans, such as those by federal HUD,
FHA, and the VA, are not regulated by the Homeowner
Protection Act. These programs impose their own
requirements for PMI cancellation, if at all.
• Second mortgages are also not regulated by the Homeowner
Protection Act and, hence, do not qualify for PMI
termination.
Why do I need PMI?
Studies have shown that homeowners with less than 20 percent
invested in a home are more likely to default on their loans, making
low down payment mortgages risky to lenders. Lenders require PMI
on low down payment mortgages to reduce their risk should the
borrower default on the loan.
How Does PMI Help Me?
Private mortgage insurance makes it possible to buy a home sooner
because you don’t have to put down as much money up front.
• First time buyers benet because they do not have to save as
much money to buy that rst home.
• If you are trading up, PMI allows you to consider homes in
a wider price range.
• Whether you are buying your rst home or moving to
another, you can make a smaller down payment and keep
more of your savings for other uses.
Does PMI Oer Any Tax Advantages?
• e larger loan possible with PMI boosts your tax deductions
for mortgage interest.
4 • Private Mortgage Insurance
How much does it cost?
Premiums vary. ey are determined by the size of the down payment,
the type of mortgage and amount of insurance. Premiums are typically
included in your monthly mortgage payment. e average range for a
$100,000 loan is $25 to $65 per month. Dierent payment schedules
are available. Contact your lender to discuss your options.
How to terminate your PMI
1. Pay down your mortgage.
If the current balance of your mortgage is less than 80% of the original
purchase price of your property and your mortgage was originated
prior to 7/29/99, it is possible you may no longer be required to
continue paying PMI. Contact your lender for more information. If
it was originated after 7/29/99, it must automatically terminate when
your balance reaches 78% of the original value of your home. You
may also initiate termination, in writing, when your balance reaches
80% of the original value.
2. Increase the value of your property.
If the value of your property has increased, due to home improvement
or market conditions, you may no longer be required to pay PMI. If
the current balance of your mortgage is less than 80% of the current
value of your property, your lender may allow you to terminate PMI.
Most lenders will require an appraisal (at cost to you). For example, a
homeowner who owes $160,000 on a $200,000 home still owes 80%
of the home’s value. But if that home’s value has grown to $400,000,
the debt now represents only 40% of the home’s value. Contact your
lender for more information.
Recent federal data has shown that the average home value in
Massachusetts increased 7.9% in the past year alone. Now might be
a good time to see if you qualify to cancel your PMI.
Private Mortgage Insurance • 5
Where to call for enforcement
For loans obtained through a depository lender insured by the
Federal Deposit Insurance Corporation, the FDIC shall enforce the
requirements of this statute. Contact the FDIC’s Boston regional
oce at:
Division of Compliance and Consumer Aairs
15 Braintree Hill Oce Park
Braintree, MA 02184
(781) 794-5500
www.fdic.gov
For loans obtained through a non-FDIC-insured THRIFT depository
lender, contact the Oce of rift Supervision’s Northeast oce at:
10 Exchange Place, 18th oor
Jersey City, NJ 07302
(201) 413-1000
www.ots.treas.gov
For a loan owned by a credit union, contact the National Credit
Union Administration’s regional oce at:
Region One Oce
9 Washington Square, Washington Avenue Extension
Albany, NY 12205
(518) 862-7400
www.ncua.gov
To obtain a copy of the federal statute visit the federal government’s
website where this public law (P.L. 105-216) is posted:
http://www.access.gpo.gov/nara/publaw/105publ.html
For other helpful consumer information on banking issues, contact:
Federal Reserve Bank of Boston
600 Atlantic Avenue
Boston, MA 02106
(617) 973-FIND (3463)
www.bos.frb.org
Contact your lender for more information.
6 • Private Mortgage Insurance
HERE IS A QUICK FORMULA TO
DETERMINE IF YOU MAY BE ELIGIBLE
TO CANCEL YOUR PMI:
* An appraisal that is acceptable to the holder of the mortgage.
Box A: Present balance
of your mortgage.
x 1.25
Box B: Minimum
value of your property
to cancel PMI.
=
Box C: e amount
you purchased your
property for, or a cur-
rent appraisal* on your
property (whichever is
greater).
u If the result of Box B is greater than Box C,
your lender will probably continue to require PMI.
u If the result of Box B is less than Box C,
you may be able to cancel PMI.
Private Mortgage Insurance • 7
William Francis Galvin
Secretary of the Commonwealth
Citizen Information Service
One Ashburton Place, Room 1611
Boston, MA 02108
