Private Mortgage Insurance – Are You Overpaying?
Everyone groans when they first hear about private mortgage insurance. Some borrowers may be antsy and try to find the quickest way to get rid of mortgage insurance. But what if you do not carefully consider your monthly mortgage statement until one day you find out that you are paying private mortgage insurance after it should have been cancelled by operation of law?
It may surprise you that you have legal rights and that you may sue if your loan holder or loan service has charged you Private Mortgage Insurance (sometimes referred to as “PMI”) after it is supposed to be terminated. It may not surprise you that, despite modern age technology, this happens quite often.
Federal law determines when the borrower may request for private mortgage insurance to be cancelled and mandates when private mortgage insurance be ultimately terminated as a matter of law.
Scope of the Private Mortgage Insurance Law
Before getting into how to request and/or when private mortgage insurance is to be automatically terminated, it is important to note the scope of the law of private mortgage insurance. The scope of the private mortgage insurance law, as it relates to the termination of private mortgage insurance, includes “residential mortgage transactions” defined as mortgage loan transactions consummated on or after July 29, 1999 to finance the acquisition, construction (initial), or refinancing of a single-family dwelling that is the borrower’s principal residence. The Act does not apply to residential mortgage transactions for which Lender Paid Mortgage Insurance is required (12 USC 4905(b)).
Three questions to ask yourself before considering if you have a case for overpaying private mortgage insurance after it should have been automatically terminated is:
- Is the loan on your primary residence?
- Was the loan originated after 1999? and
- Is my loan a conventional loan – this act does not apply to government loans (FHA, VA)
Request Cancellation of PMI
You may be able to request that your private mortgage insurance be terminated as a matter of request. This typically happens through housing appreciation or paying down the balance of your loan. Under 12 U.S. Code § 4902 a borrower my request that a loan servicer cancels the borrower’s private mortgage insurance (“PMI Law”). In order to be successful in your request to cancel your private mortgage insurance, you must:
1. Submit a request in writing to the servicer that cancellation be initiated;
2. Have a good payment history with respect to the residential mortgage;
3. Must be current on the payments required by the terms of the residential mortgage transaction;
4. Provide evidence that your home has (a) not decreased in value, and (b) certify the value of the home (get an appraisal); AND
5. The principal amount of your mortgage must be 80% of your original value. “Original Value” is the lesser of the sales price or the appraised value at the time of loan origination (appraised value when the loan is a refinance).
Please note that certain lenders may prevent you from requesting cancellation for two to three years from the date of loan origination and may reorder an appraisal at the homeowner’s expense. This may be a very good option for a borrower to save some cash every month.
Automatic Termination of Private Mortgage Insurance
This is where you may be able to exercise your legal rights via a lawsuit. Under the same statute as mentioned above, a lender or a loan service must automatically cancel private mortgage insurance under the following circumstance:
1. The mortgage’s principal balance is scheduled to reach 78% of the Original Value, as described above, of the secured property (based solely on the initial amortization schedule in the case of a fixed rate loan or on the amortization schedule then in effect in the case of an adjustable rate loan, irrespective of the outstanding balance).
2. The borrower must be current or becomes current on the first day of the first month following the date that the borrower becomes current (12 USC 4902(b)).
In cases where the loan servicer charges beyond this cutoff point, the borrower may have legal rights in regards to over-payment of private mortgage insurance. They may be entitled to actual damages (the amount that they paid over what they were supposed to), attorney’s fees, and statutory damages not to exceed $2,000.00.
Typically, when a borrower puts down 0%, it takes 12 years for private mortgage insurance to be automatically terminated. When a borrower puts a down-payment of 5%, it should take 10 years for private mortgage insurance to reach its automatic termination point. When a borrower puts a 10% down payment on their home, expect automatic termination to be around 8 years.
12 U.S. Code § 4902 (d) states, “[i]f a mortgagor and mortgagee (or holder of the mortgage) agree to a modification of the terms or conditions of a loan pursuant to a residential mortgage transaction, the cancellation date, termination date, or final termination shall be recalculated to reflect the modified terms and conditions of such loan.”
In situations where the borrower has obtained a loan modification the servicer must recalculate private mortgage insurance payments appropriately. This sometimes causes problems for the servicer to ensure compliance with private mortgage insurance law.
Damages for violation of this law are found in 12 USC §4907. Any servicer, mortgagee, or mortgage insurer that violates a provision of this chapter shall be liable to each mortgagor to whom the violation relates for the amount of actual damages, accruing from the date on which the violation commences, such statutory damages as the court may allow, not to exceed $2,000, costs of the action, and reasonable attorney fees, as determined by the court.
Statute of Limitations
No action may be brought by a mortgagor later than 2 years after the date of the discovery of the violation that is the subject of the action.
Please contact us if you feel that you are paying private mortgage insurance when you do not have to. You may be eligible for a cash reward and free legal representation.