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August 29, 2002
"Finer Points Of Private Mortgage Insurance"
When people go to buy a house for the first time, they are confronted by this strange kind of insurance that actually insurers their lender, not them. It's called private mortgage insurance and it causes a great deal of confusion among borrowers.
Here is how it works: When you put down a down payment of less than 20 percent when buying your house, your lender requires you to buy private mortgage insurance (PMI), which can cost anywhere from $200 to $500 a month, or more, depending on the size of your mortgage. If you default on your mortgage payments, the mortgage insurance company will make the payments to make the lender whole. Lenders require this because their experience has shown that borrowers with less than 20 percent in equity tend to walk away from the home and leave them holding the bag, if they fall behind on mortgage payments. Most borrowers hate being forced to pay monthly premiums to insure that their lender won't get stuck, so they do anything they can to avoid paying PMI. Sometimes, they borrow additional money from elsewhere to be able to put 20 percent or more down. In the past, most mortgage insurers "absentmindedly" forgot to stop collecting PMI premiums once a homeowner had paid down enough principal on their mortgage to have more than 20 percent equity. In fact, this happened to Rep. Jim Hansen of Utah who found out he was still paying PMI long after he had accumulated over 20 percent equity. He got rather mad about it, and sponsored a bill called the "Homeowner’s Insurance Protection Act of 1999," which went into law in July 1999. This law requires that any new mortgage made after that time automatically drop PMI premiums after you have reached 20 percent equity. Still, many people continue to pay it needlessly. For example, say your home has appreciated sharply in the last few years -- you could have more than 20 percent equity without having paid down that much principal on your mortgage. To get the PMI removed, just get a current appraisal showing you have plenty more than 20 percent equity, and you can get the PMI taken off. To get a free brochure called "A Consumer Guide to Canceling Mortgage Insurance," write toMortgage Insurance Companies of AmericaYou can also call 202-393-5566, or visit www.privatemi.com.
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