If you got stuck with private mortgage insurance when you got your home loan, you probably can't wait to get rid of the pesky monthly fee. PMI benefits your lender and adds to your monthly mortgage bill. Along with an escrow account, PMI is a necessary evil when you finance a home with less than a 20 percent down payment or refinance your home with minimal equity. You can usually cancel the escrow and PMI after a certain amount of time.
PMI protects your conventional lender by reimbursing it if you default on the loan. PMI coverage offsets the lender's risk in financing you with little money down or less than 20 percent equity on a refinance. An escrow requirement also minimizes the lender's risk. With the account, your lender collects real estate taxes, homeowners insurance and PMI premiums from you each month, ensuring that they are paid on time each year. The escrow requirement can benefit you, too, by dividing costs into monthly installments, which the lender is responsible for remitting.
The Homeowner's Protection Act of 1998, also known as the PMI Act, makes it possible for you to eventually cancel PMI. The act allows you to cancel if you got the loan on or after July 29, 1999, and meet lender-specific requirements. In general, you'll have to stick with your PMI for the life of your loan if you got it before the act's effective date. You can also refinance or sell your house to pay off the debt if you no longer want PMI.
PMI is canceled in one of two ways: automatically or by request. When you pay the loan down to 78 percent of the home's original value, the lender must automatically cancel PMI, according to the Department of Housing and Urban Development. You have to be current on the mortgage for automatic cancellation. You can request cancellation when you've paid the loan down to 80 percent. Your lender has certain criteria you must meet to cancel PMI by request. Rules about canceling escrow accounts are less cut and dry. Most lenders don't allow you to cancel it, so you have to refinance with the same lender or a new one to get rid of the account.
The PMI Act's provisions reward responsible borrowers by removing PMI when the lender faces less risk. Different cancellation requirements apply for high-risk loans. Fannie Mae and Freddie Mac, which back a majority of conventional loans, determine what is considered high risk on loans with balances less than $417,000. The lender determines the level of risk on loans above this amount, known as jumbo loans. If your lender refuses to cancel PMI, it may be because you are considered high risk.
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