Know your rights for canceling PMI on your original mortgage or refi
Under certain circumstances, having sufficient home equity isn't enough.
Traditionally, lenders take the position that if you have at least 20 percent equity in your home, that is sufficient security. But what if you get a loan of 90 or even 95 percent of the purchase price? Then, lenders want insurance to pay them for any loss if there is a foreclosure. If you obtain an FHA or a VA loan, you pay the government for this insurance; otherwise, your lender arranges for private mortgage insurance, and you have to pay for this, usually on a monthly basis.
Over the years, this insurance was abused. Homeowners were unable to get this PMI canceled, despite having more than adequate equity. Accordingly, in 1999, Congress enacted the Homeowners Protection Act, also known as the PMI Cancellation Act.
The act applies primarily to residential mortgage loans, and includes single-family homes, condominiums and cooperatives. The requirements of the law vary depending on whether your loan is a high risk (as defined by your lender in the case of a nonconforming loan) or a conforming loan by Fannie Mae or Freddie Mac.
If your loan balance hits 80 percent of the original value when you first obtained the loan and you ask your lender to terminate the insurance, the lender must comply. And in your case that relates back to your refinance loan, not your original loan.
And when your loan to value drops down to 78 percent, cancellation of the insurance is automatic.
However, the lender is not obligated to accept your request for termination if you have a second mortgage or you have had late payments for 30 days or more during the year before you request the cancellation.
If your loan was under Fannie or Freddie, you have the right to terminate after two years if the loan balance is no more than 75 percent of the current appraised value, and after five years if it is no more than 80 percent. Note that I used the words "current appraised value." This is different and generally more favorable to homeowners because where homes do appreciate, you will be able to reach the termination percentages faster.
You may have to obtain and pay for an appraisal or your lender may have a local Realtor contact you to condust a BPO (Broker Price Opinion) to provide a less formal valuation of the property. Make sure your lender approves of the appraiser you plan to use; otherwise, you will have to pay another appraiser for the same task.
By Benny Kass