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Chapter 8. Planning for the Home > Private Mortgage Insurance

Private Mortgage Insurance

PMI, or Private Mortgage Insurance, is often required by lenders when people buying a home put down a deposit of less than 20% of the purchase price. The cost of PMI shows up on your monthly mortgage bill and is used to pay for insurance that protects the lender if you default on your mortgage loan. Over the lifetime of a mortgage, the cost to you can be quite significant. For instance, on a $100,000 loan with 10% down, PMI could cost you $40 a month or $480 a year. Multiply this by the life of your loan and you are talking about a lot of money.

A little known law entitled the Homeowners Protection Act, which went into effect in 1999, sets out rules for automatic termination and cancellation of PMI on home mortgages. The law applies to certain home mortgages since July 29, 1999, for the purchase or refinance of single-family homes. The law does not apply to FHA or VA loans. According to this law, once your equity in the home reaches 22%, based on the original property value, the PMI must be terminated and you will not be required to pay further premiums so long as you are up to date with your mortgage payments. In addition, once you reach 20% equity in your home, based on the original property value, you have the right to have your PMI canceled on request, again if your mortgage payments are current. The law now requires borrowers to be told at both the closing and annually about their rights to cancel PMI. Even if you signed your mortgage before 1999, you can still ask your lender to cancel your PMI when your equity exceeds 20%, although the law does not require them to cancel the insurance. Many lenders are willing to terminate the PMI in these circumstances, although the law does not require them to do so.



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