private mortgage insurance

Case Study Lenders often require private mortgage insurance (PMI) when a borrower puts less than 20% down on a home mortgage. The insurance protects the lender in the event the borrower defaults on the loan. The Homeowners Protection Act of 1998 established certain rules for automatic termination and borrower cancellation of private mortgage insurance on home mortgages. For home mortgages signed on or after July 29, 1999, PMI must generally be terminated automatically when the loan reaches 22% equity, based on the original property value. For example, a $150,000 home is purchased with $15,000 (10%) down. Private mortgage insurance should be automatically canceled when the outstanding balance on the mortgage is reduced to $117,000 (78% of the original property value). The automatic cancellation does not apply if payments by the borrower are not current, or if the loan is considered “high risk." It also does not apply to FHA or VA loans or to loans with lender-paid PMI. Some states have enacted laws relative to private mortgage insurance, even for mortgages signed prior to July 29, 1999.