Private mortgage insurance has enabled millions of Americans to buy a home without making a large down payment, but many homeowners pay the premiums longer than required.
An estimated 25 million Americans who lacked a 20 percent down payment have been able to buy a home by agreeing to insure the mortgage against default, according to the Mortgage Insurance Companies of America. In March alone, 18,098 borrowers used private mortgage insurance to buy or refinance their homes for more than $4.4 billion in new policies. A total of nearly $621 billion in polices are now in force.
Mortgage insurance gives borrowers with less cash greater access to home ownership, reports the Federal Reserve, and also plays an important role in the mortgage industry by protecting lenders against default.
Federal law requires lenders to automatically cancel private mortgage insurance policies once a mortgage is paid down to 78 percent of the purchase price. The same law allows homeowners to take steps to cancel the policy once they’ve reduced the mortgage to 80 percent of the appraised value of a home or the original purchase price, whichever is less, the Federal Reserve said. The laws apply to loans obtained after July 19, 1999, but do not cover government-guaranteed loans, loans on second homes and loans that originated before the law went into effect.
By taking the initiative to cancel the policy, homeowners can save on unnecessary premiums ranging up to $1,200 a year, the Federal Reserve said.
The Homeowners Protection Act requires lenders to disclose the terms of the private mortgage insurance policy on loan closing statements, once every year and at the termination of the policy. Homeowners submit a letter to request cancellation and may be required to document the current value of their home.
“Although mortgage insurance may have allowed you to purchase a home, there will come a time when this added monthly expense will no longer directly benefit you,” said www.quickval.com, a home appraisal affiliates network. “You are, ultimately, your own financial advisor, and even the smallest expense should be eliminated if at all possible.”