If you put less than 20% down on your house, your lender will insist that you pay Private Mortgage Insurance (PMI). This type of insurance doesn’t protect you; it protects the lender. If you default on your mortgage, the lender receives payment for the loan given to you. That way, the lender doesn’t lose as much money if you don’t pay your mortgage.
In most cases, PMI is added to your mortgage payment. You make the premium payments as a way to protect the lender for taking a chance on you, since you didn’t put a large down payment on your home. The good news is that PMI can be canceled once you meet certain requirements. The one except to this rule is PMI on FHA loans. As of June 3, 2013, most FHA loans will require mortgage insurance for the life of the loan.
According to the Homeowners’ Protection Act, which applies to those who purchased homes after July 29, 1999, lenders are required to automatically cancel your PMI after your have paid off your loan to a point that only 78% of the balance remains. However, it is possible for you to have your PMI canceled before that, as long as you take the initiative. You can ask your lender to cancel the PMI when your mortgage balance is down to 80% of the home’s value. However, be aware that the individual requirements of the lender might mean you are rejected.
As you work to get rid of your PMI, here are some of the steps to follow:
According to the law, the lender has to cancel the insurance when you have paid your loan down to 78% of the amount borrowed. So, you can wait for that benchmark to be released. However, it is possible for you to ask for the lender to reconsider. You should ask in writing.
Write a polite letter, and have it delivered certified mail (keep the receipt proving the lender received your correspondence), requesting that the lender take action. Include documentation of the home’s appraisal, as well as point out that you have made your payments on time. You can bolster your case by pointing out that you are a low default risk, since you have been making regular, on-time payments for years.
You want to keep copies of the letters, and the proof that your lender received them, for future purposes. In some cases, lenders and their insurers move slowly (rather than saying no) in order to keep charging you PMI. If you feel that you are meeting the guidelines for cancelation of PMI, you can actually take the lender to small claims court in order to force action on your request. This is where having copies of the lender’s guidelines, in writing, and the correspondence exchanged with the lender, comes in handy.
You don’t have to pay PMI forever. Pay attention to the value of your home, and the rate at which you are paying down your mortgage. You can save money in the long run by exercising your rights.
Photo by bobcat rock.
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