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Private Mortgage Insurance

By Beth Drucker

If you're buying a home that's expensive enough that you need to take out loans to pay for more than 80% of the cost, your lender might require that you buy Private Mortgage Insurance (PMI). Once you buy the insurance, your lender will not have to worry about you defaulting on your loan, and will therefore allow you to buy the property - sometimes with as little as 3 or 5% down payment.

In 1998 the Homeowner's Protection Act (HPA) was passed, requiring lenders to disclose certain information concerning loans secured by the consumer's primary residence obtained on or after July 29, 1999. Additionally it contains disclosure provisions for mortgage loans that closed before that date. This law benefits the homeowner by making lenders share responsibility for how long the homeowner remians under PMI coverage - a responsibility that the homeowners used to bear alone, despite the fact that most homeowners under PMI coverage don't realize that they can drop PMI coverage, which has really high premiums, once their loan balances are paid down to 80% of the property value at the time it was purchased - either the purchase price or the appraisal value, depending on which is less.

In order to cancel your PMI coverage, you need to have a good payment history. Additionally, you can not have taken out a second mortgage. Your lender might need evidence that the property value has not decreased since you bought it. Under HPA, mortgage lenders must automatically cancel your PMI coverage on most loans once you pay down your mortgage to 78%, and must do so within 30 days of cancellation or the automatic termination date. For high risk loans, lenders can wait until the mortgage is paid down to 77% of the original value.

If your home value has increased, you may be able to cancel PMI early. You should contact your lender to see if they are willing to consider the current property value. Also make sure to ask what documents you will need to prove that your property value increased.

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