What Is PMI?
PMI is extra insurance that lenders require from most homebuyers
who obtain loans that are more than 80 percent of their new
home's value. In other words, buyers with less than a 20
percent down payment are normally required to pay PMI.
PMI plays an important role in the mortgage industry by
protecting a lender against loss if a borrower defaults on
a loan and by enabling borrowers with less cash to have greater
access to homeownership. With this type of insurance, it
is possible for you to buy a home with as little as a 3 percent
to 5 percent down payment. This means that you can buy a
home sooner without waiting years to accumulate a large down
New PMI Requirements
A new federal law, The Homeowner's Protection Act (HPA)
of 1998, requires lenders or servicers to provide certain
disclosures concerning PMI for loans secured by the consumer's
primary residence obtained on or after July 29, 1999. The
HPA also contains disclosure provisions for mortgage loans
that closed before July 29, 1999. In addition, the HPA includes
provisions for borrower-requested cancellation and automatic
termination of PMI.
Why a Change in PMI Requirements?
In the past, most lenders honored consumers' requests to
drop PMI coverage if their loan balance was paid down to
80 percent of the property value and they had a good payment
history. However, consumers were responsible for requesting
cancellation and many consumers were not aware of this possibility.
Consumers had to keep track of their loan balance to know
if they had enough equity and they had to request that the
lender discontinue requiring PMI coverage. In many cases,
people failed to make this request even after they became
eligible, and they paid unnecessary premiums ranging from
$250 to $1,200 per year for several years. With the new law,
both consumers and lenders share responsibility for how long
PMI coverage is required.
Protection Act (HPA) of 1998
What Loans Are Covered?
Generally, the HPA applies to residential mortgage transactions
obtained on or after July 29, 1999, but it also has requirements
for loans obtained before that date. This new law does not
cover VA and FHA government-guaranteed loans. In addition,
the new law has different requirements for loans classified
as "high-risk." Although the HPA does not provide the standards
for what constitutes a "high risk" loan, it permits Fannie
Mae and Freddie Mac to issue guidance for mortgages that
conform to secondary market loan limits. Fannie Mae and Freddie
Mac are corporations chartered by Congress to create a continuous
flow of funds to mortgage lenders in support of homeownership.
As of January 1, 2000, mortgages in amounts of $252,700 or
less are considered conforming loans. For non-conforming
mortgages, the lender may designate mortgage loans as "high
What Is a Residential Mortgage Transaction?
There are four requirements for a transaction to be considered
a residential mortgage transaction: (1) a mortgage or deed
of trust must be created or retained; (2) the property securing
the loan must be a single-family dwelling; (3) the single-family
dwelling must be the primary residence of the borrower; and
(4) the purpose of the transaction must be to finance the
acquisition, initial construction, or refinancing of that
How Do You
Cancel or Terminate PMI?
Under HPA, you have the right to request cancellation of
PMI when you pay down your mortgage to the point that it
equals 80 percent of the original purchase price or appraised
value of your home at the time the loan was obtained, whichever
is less. You also need a good payment history, meaning that
you have not been 30 days late with your mortgage payment
within a year of your request, or 60 days late within two
years. Your lender may require evidence that the value of
the property has not declined below its original value and
that the property does not have a second mortgage, such as
a home equity loan.
Under HPA, mortgage lenders or servicers must automatically
cancel PMI coverage on most loans, once you pay down your
mortgage to 78 percent of the value if you are current on
your loan. If the loan is delinquent on the date of automatic
termination, the lender must terminate the coverage as soon
thereafter as the loan becomes current. Lenders must terminate
the coverage within 30 days of cancellation or the automatic
termination date, and are not permitted to require PMI premiums
after this date. Any unearned premiums must be returned to
you within 45 days of the cancellation or termination date.
For high risk loans, mortgage lenders or servicers are required
to automatically cancel PMI coverage once the mortgage is
paid down to 77 percent of the original value of the property,
provided you are current on your loan.
Under HPA, if PMI has not been canceled or otherwise terminated,
coverage must be removed when the loan reaches the midpoint
of the amortization period. On a 30-year loan with 360 monthly
payments, for example, the chronological midpoint would occur
after 180 payments. This provision also requires that the
borrower must be current on the payments required by the
terms of the mortgage. Final termination must occur within
30 days of this date.
Disclosures Does the HPA Require?
For Loans Obtained on or after July
The HPA establishes three different times when a lender
or servicer must notify a consumer of his or her rights.
Those times are at loan closing, annually, and upon cancellation
or termination of PMI.
The content of these disclosures varies depending on whether:
(1) PMI is "borrower-paid PMI" or "lender-paid PMI," (2)
the loan is classified as a "fixed rate mortgage" or "adjustable
rate mortgage," or (3) the loan is designated as "high risk" or
At loan closing, lenders are required to disclose all
of the following to borrowers:
- The right to request cancellation of PMI and the date
on which this request may be made.
- The requirement that PMI be automatically terminated
and the date on which this will occur.
- Any exemptions to the right to cancellation or automatic
- A written initial amortization schedule (fixed-rate
Annually, your mortgage loan servicer must send borrowers
a written statement that discloses:
- The right to cancel or terminate PMI.
- An address and telephone number to contact the loan
servicer to determine when PMI may be canceled.
When the PMI coverage is canceled or terminated, a notification
must be sent to the consumer stating that:
- PMI has been terminated, and the borrower no longer
has PMI coverage.
- No further PMI premiums are due.
The obligation for providing notice of cancellation or termination
is with the servicer of the mortgage.
For Loans Obtained before July 29,
|To get a better idea of where
you stand with your mortgage, try the following formula:
An annual statement must be sent
to consumers whose mortgages were obtained before July 29,
1999. This statement should explain that under certain circumstances
PMI may be canceled (such as with consent of the mortgagee).
It should also provide an address and telephone number to
contact the loan servicer to determine whether PMI may be
The HPA's cancellation and automatic termination rules do
not apply to loans made before July 29, 1999.
Although parts of the new law apply only to loans obtained
on or after July 29, 1999, many lenders report that they
plan to follow the HPA's requirements for both new and existing
loans. Making a call to your mortgage loan servicer will
help you understand exactly how the law applies to you and
What If Your
Home Value Has Increased?
When making mortgage payments, most of the payments during
the first few years are finance charges. Therefore, it can
take 10 to 15 years to pay down a loan to reach 80 percent
of the loan value. If the home prices in your area are rising
quickly, your property value may increase so that you can
reach the 80 percent mark a lot faster. Your property value
could also increase due to home improvements that you make
to your home.
If you think your home value has increased, you may be able
to cancel PMI on your mortgage. Although the new law does
not require a mortgage servicer to consider the current property
value, you should contact them to see if they are willing
to do so. Also, be sure to ask what documentation may be
required to demonstrate the higher property value.
For More Information
This overview was researched and written
by Consumer Affairs and Public Information staff at the
Federal Reserve Bank of San Francisco.