How to Cancel PMI
by Gary Foreman
Dear Gary,
I have a problem with my PMI. I have contacted the mortgage company on four
different occasions to talk about canceling it. I want the extra money to start
paying down the mortgage. On call one I was told it was going to automatically
drop that same month so I did nothing. When several months had passed I called
again. This time I was told again it would be dropped in two months. So again I
waited. When several more months had gone by I called again. This time I was
told it would automatically drop when the balance reached 75%. That was two
months ago. Today I called again and guess what, I now have paperwork I need to
fill out, get an appraisal (which I pay for) and then it should be dropped.
Is this normal or am I just being BS'd again. I
had read for a long time how difficult it is to get them to drop PMI. Now I know
what they mean. What can I do to get it dropped? Are there any rules, laws or
governing bodies I can talk to about this constant run around? Keith
Keith has a lot of company. Most mortgages offered
with less than a 20% down payment will require PMI (private mortgage insurance).
So a lot of people pay for PMI.
PMI protects the lender if you default on the loan.
It does not protect the borrower. It's fairly expensive insurance and is
calculated based on how big your mortgage is. Your lender can tell you exactly
how much you pay for PMI.
Back in the 90's some lenders were taking advantage
of PMI. They would continue to charge the borrower for PMI long after they had
reached the level of equity necessary to drop it.
Back in 1998 the Homebuyers Protection Act (HPA) was
passed. It required lenders to notify homeowners when they had 20% equity in
their home and terminate PMI when equity reached 22%.
Note that HPA does not require the lender to drop
PMI if home appreciation causes home equity to go above the required levels.
Only if payments cause it to reach that level. But most lenders will drop PMI if
the equity in the home reaches the threshold level.
We won't get into all the different calculations as
to whether you still need PMI. There are plenty of info available on that. We'll
focus on getting PMI terminated when the time is right.
Let's start by going directly to the law. In section
3, the act pretty clearly defines how a borrower can cancel.
(a) BORROWER CANCELLATION.-A requirement for
private mortgage insurance in connection with a residential
mortgage transaction shall be canceled on the cancellation date,
if the mortgagor-
(1) submits a request in writing to the servicer that cancellation
be initiated;
(2) has a good payment history with respect to the residential
mortgage; and
(3) has satisfied any requirement of the holder of the mortgage
(as of the date of a request under paragraph (1)) for-
(A) evidence (of a type established in advance and
made known to the mortgagor by the servicer promptly
upon receipt of a request under paragraph (1)) that the
value of the property securing the mortgage has not
declined below the original value of the property; and
(B) certification that the equity of the mortgagor in
the residence securing the mortgage is unencumbered by
a subordinate lien.
According to the HPA the lender must drop PMI within
30 days of the automatic termination date or cancellation. When PMI is cancelled
the lender is required to send notification that there is no PMI coverage and no
further premiums are due.
Now that we know the law, let's see if we can't
create a step-by-step procedure for canceling PMI.
The first step is to contact your mortgage company
and ask some questions. Call them and have them send you the requested info.
You'll want to know three things. First, what is the equity threshold required
to cancel PMI. Usually 20 to 25% depending on who holds the mortgage.
Secondly, you'll want to know if an appraisal is
required. And, if so, are there approved appraisers that you must use. Expect to
pay approximately $400 for the appraisal.
Finally, find out where to send your cancellation
letter. It may be the same address where you send your monthly payment. But, you
want to be certain. So ask.
Once you know that you can go to work. Get the
appraisal done. Assuming that it shows that you are over the threshold for
canceling PMI, write a letter to your lender questing cancellation. It doesn't
need to be fancy. The letter should include the current value of your home, the
amount of your loan, and a sentence saying that you want to terminate PMI.
Include a copy of the appraisal with the letter.
Some might consider it overkill, but sending the
letter via certified mail or overnight service is a good idea. That way you have
positive proof of it's receipt.
Yes, Keith has been jerked around. But, an appraisal
plus a letter (or forms) should put an end to the monthly PMI. And, using the
money freed up to reduce his principal is a great idea!
Gary Foreman is a former financial planner who
currently edits The Dollar Stretcher.com
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