WHAT IS PRIVATE MORTGAGE INSURANCE (PMI)?
Private Mortgage Insurance (PMI) is private insurance that protects a LENDER in the event that a homeowner defaults on a loan. Most lenders require a 20 percent down payment. Private Mortgage Insurance allows those who are unable to pay 20 percent to take out a mortgage by insuring the lender against the risks of foreclosure. The lender pays private mortgage insurance, but buyers who cannot pay 20 percent equity have to pay a higher interest rate to cover the insurance. The FHA also offers a similar insurance that provides the same lack of protection for the homeowner.
A significant portion of all home owners are required to purchase PMI as a condition of being accepted for a loan, however, most do not understand what type of protection it offers, and most importantly, WHOM it protects. As a result, many new homeowners pass up the opportunity to purchase life insurance (mortgage protection) in the mistaken belief that they are already covered. This can result in tragic circumstances when an income provider dies or becomes disabled and the homeowner discovers, too late, that the PMI they were required to pay for ONLY protects the lender, DOES NOT pay off their mortgage or make the payments and; consequently, they can lose their home to foreclosure.
Not only does PMI NOT protect the homeowner, it is not even deductible as the result of a long standing IRS regulation. Congress is currently reviewing that status, however, differences in how such a deduction would work and election year politics makes it unlikely that any relief will be granted in the near future.
ARE YOU REQUIRED TO CARRY PMI?
PMI is maintained at the option of the current owner of the mortgage (lender). In many cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 80% of the original property value. However, the degree of equity in the home is not the only factor that a lender may take into consideration. Note that the law in certain states requires that mortgage insurance be canceled under some circumstances.
CAN YOU RECEIVE A REFUND?
If all the mortgage insurance was financed at the time of origination and is canceled prior to its maturity, the homeowner may be entitled to a refund if the refundable option was chosen at time of origination. However, if the no refund/limited option was chosen, no refund is due.
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.
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.
WHY YOU SHOULD CONSIDER MORTGAGE PROTECTION.
If you want to protect your mortgage against foreclosure because a death or disability prevents the mortgage from being paid, you must do so by purchasing a life or disability insurance policy that allows you to designate the beneficiary(s) of your choice. This is the ONLY way you can be sure that your loved ones will not lose their home in the event of a tragedy.
