by Gary Foreman
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 that 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 I now have paperwork I need to fill out, an appraisal needs to be scheduled (which I pay for), and then it should be dropped.
Is this normal? 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 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 90s, 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 is plenty of information available on that. Instead, 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 information. You'll want to know three things. First, you'll want to know the equity threshold required to cancel PMI. It is 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 its 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 and purchasing manager who founded The Dollar Stretcher.com website and newsletters in 1996. He's been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com. Gary shares his philosophy of money here. You can follow Gary on Twitter. Gary is also available for audio, video or print interviews. For more info see his media page.
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