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Private
Mortgage Insurance
Most
first-time home buyers purchase their homes using mortgages with
relatively small down payments. To protect themselves from losses in
the event a borrower with such a mortgage defaults early in the life of
the loan, lenders typically require borrowers to pay for private
mortgage insurance (PMI).
In theory, but not always in practice, the
insurance is
dropped once the borrower builds up enough equity in the home to give
the lender sufficient security to remove any risks of loss to the
lender. Testimony before a congressional committee indicated that
payment for unnecessary PMI is wide spread and sometimes continues over
the entire life of a 30 year loan. One analysis of a portfolio of
20,000 loans showed that one in five homeowners has PMI unnecessarily. A
new federal law makes it easier to cancel PMI, which could mean
substantial savings for a typical homeowner. The Homeowners Protection
Act of 1998 applies to new residential mortgages and refinancings
entered into after July 28, 1999. Most such mortgages are covered, but
some government mortgage guarantee programs and high-risk mortgages are
exempt. As a general rule, the Act requires automatic
termination of PMI when the borrower's equity in the home reaches 22%
of its original value and the borrower is current on mortgage payments.
When the amount of equity equals 20%, a borrower with a good payment
history may request cancellation of PMI. The Act also requires lenders
to notify borrowers at closing, and annually thereafter, of their
cancellation and termination rights under the Act. The
primary enforcement mechanism for the Act is private litigation.
Borrowing from other consumer credit laws, Congress made lenders who
violate provisions of the Act liable to borrowers for actual damages
with interest and statutory damages up to $2,000, plus the costs of
bringing the action and attorney fees. |
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14881 FARMINGTON ROAD, LIVONIA, MICHIGAN 48154 | 734.422.5900
We provide services to Wayne, Oakland, Macomb, and Livingston counties.
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