Private Mortgage Insurance

Private mortgage insurance is an extra insurance a lender makes it mandatory for a borrower to pay when the borrower makes a down payment that is less than 20% of the property value. Alternatively, it can also be said that private mortgage insurance (PMI) is paid by a borrower if he avails a loan that exceeds 80% of the property value.

The Homeowner’s Protection Act or HPA (1998), a new federal law requires that lenders should provide disclosures related to PMI for loans that are obtained on/after 29th July 1999 and in which the borrowers had used their primary residence as collateral. The new law also includes disclosure provisions related to mortgage loans that were closed before 29th July, 1999. Provisions related to cancellation as well as automatic termination of PMI requested by borrowers are also included as per the new law.

Why was the change required? Earlier borrowers did not have to pay PMI if they paid more than 80% of the property value as down payment. However, it was found that majority of the borrowers were unaware that they could request lenders to curtail or drop private mortgage insurance payments. As such, there were many ignorant borrowers who kept on paying PMI despite the fact that they were not required to do so. Moreover, consumers had to frequently keep a track of the loan to see if there is enough equity. Depending on the equity, they requested the lenders to drop PMI. So, with the implementation of the new law, the borrowers as well as the lenders are equally responsible to stop PMI payments when applicable.

What loans are covered under the HPA (1998)?

• Residential mortgage transactions that were carried out on/after 29th July, 1999 fall under the purview of the new HPA law.
• VA loans and FHA loans guaranteed by the government are not covered under the new law.
• The loans that fall in the “high risk” category are not covered by the new law.

How do you benefit from PMI? Private mortgage insurance (PMI) protects lenders if borrowers fail to make payments in a proper manner. On the other hand, it also helps the borrowers by helping them to own their dream homes even if the down payment amount isn’t enough.

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