How To Cancel PMI Payments

Lenders require mortgage insurance on high LTV and low down payment loans as protection against borrower default. Once the increased risk of borrower default is gone (when the loan-to-value ratio is reduced to 80% or less), mortgage insurance has fulfilled its purpose. In the past, many lenders did not cancel PMI even when the risk was reduced. The Homeowners Protection Act of 1998 (HPA) requires lenders to automatically cancel PMI when a home has been paid down to 78% of its original value. The law has some exceptions, such as for multi-family units, non-owner-occupied homes, mortgages on second homes, and second mortgages. As is often the case, though, the law sets a minimum, but the market moves the bar higher. For example, Fannie Mae and Freddie Mac have:

1) Adopted rules that apply the 78% cancellation rule to all of their mortgages, even those closed before HPA's mandated date of July 1999

2) Expanded the rules to cover investment properties and second homes.

3) Will consider the present value of the home, not just the original value as required by the law. This effectively cancels PMI more quickly, assuming the home appreciates. Most lenders also now follow these guidelines.

The law also says that for loans that closed after July 29, 1999 lenders must drop PMI coverage at a borrower's request if the following conditions are met:

1) A new borrower paid, lender approved appraisal shows that the loan has been paid down to 80% or less of the home's original value, and

2) Mortgage payments are current with no late payments

Fannie Mae and Freddie Mac have gone a step further than the law, allowing borrowers to use 80% of the home's current value if no payments have been more than 30 days late in the prior 12 months for fixed rate loans (or 24 months for ARMs). Fannie Mae and Freddie Mac also apply these rules to all loans, but can require up to five years of seasoning on the loan before the rules apply.

Whether through automatic or borrower requested cancellation, when PMI is terminated, the lender cancels the policy and reduces the monthly mortgage payment by the PMI amount.

In recent years, due to the economic recession, most private mortgage insurance companies have added guidelines for considering the risks of insuring loans in markets where property values are declining. Many factors could go into determining whether or not a market area is declining. For example, the nation's leading provider of private mortgage insurance, Mortgage Guaranty Insurance Corporation (MGIC), has designated a number of urban areas and certain states as "restricted markets" by using objective date to evaluate home prices, changes in median home prices, and home price projections. While it may seem reasonable to be more cautious about standards in markets where property values are in decline, the label can create problems. For example, if an entire metropolitan area is labeled as "declining" it cannot account for specific neighborhoods where properties may be, for whatever reason, highly desirable.

While every company has its own standards for defining a declining market, the result is often that the loan is put in jeopardy. Some PMI providers may simply refuse to offer mortgage insurance in these markets, forcing the borrower to come up with a 20% down payment, for example. Or the insurer may raise the premiums for PMI in those markets, which could make the loan too expensive for the borrower. Borrowers should contact a licensed mortgage broker before applying to see if their home is located in a declining market.