1. WHAT IS PMI? "PMI" stands for Private Mortgage Insurance. Typically, a PMI policy must be purchased if you wish to purchase a home with less than a 20% downpayment. This policy is designed to protect the lender if you stop making payments and the lender forecloses on your home.

 
2. IS IT BAD TO HAVE PMI? Not necessarily. Because of PMI, lenders are more willing to make loans to buyers who cannot provide higher downpayments. However, in the past some lenders continued to require expensive PMI payments from homeowners even after the equity on their homes had surpassed 20%.

 
3. HOW CAN I CANCEL PMI NOW THAT I HAVE OVER 20% EQUITY IN MY HOME? Effective July 29, 1999, a new federal law was passed in Congress dubbed "The Homeowner's Protection Act." Pursuant to the Act, lenders are required to release certain homeowners from paying PMI premiums when the equity value in their home reaches 20% of its fair market value. In order for homeowners to demand that their lender cancel PMI, homeowners must have a good credit history and may need to obtain an appraisal to confirm that the debt is only 80% of home value. When the equity in your home reaches 22%, PMI policies must be automatically dropped by the lender.

 
4. WHEN CAN PMI BE CANCELED? Under the new law, the automatic cancellation date is defined as the date when the loan is scheduled to reach 78% of the original home value of the secured property. An optional cancellation date occurs when the amortization schedule requires the loan balance to be 80% of the original value of the home used to secure the loan. That date may occur sooner if the homeowner makes additional loan payments. The "original value" is defined as either the purchase price or the appraised value at the time of purchase, whichever is lower.
A qualified appraiser or real estate professional can help you to determine whether the property value of your home is rising faster than actual payments. The increased property value can occur through appreciation or through home improvements. See "How To Increase The Value Of Your Home". In many cases, it may be more advantageous to pay for an appraisal and to then seek a cancellation of PMI once you have paid 20% down; in other cases it may be better to wait for the automatic cancellation when you have reached 22% in equity. For more information on appraising your home, call Phil Long of Points West Real Estate Services at (909) 465-0065.

 
5. HOW IS A "GOOD PAYMENT HISTORY" DEFINED? In the Homeowners Protection Act, a "good repayment history" is defined as follows: no payments may be 30 days late within one year of the cancellation request, or one payment 60 days late within two years from that request. In addition, the law mandates that fixed rate borrowers are to receive an amortization schedule which discloses when PMI may be canceled.

 
6. DOES THE NEW LAW APPLY TO ALL LOANS? No. "The Homeowners Protection Act" only applies to certain loans made as of July 29, 1999 and does not apply to loans already in place before that time. In addition the Act does not apply to FHA loans. Moreover, a lender can continue PMI up to 15 years for certain "high-risk" loans regardless of equity. To find out more information about your options in loans call Karen Clark, Senior Loan Consultant at Real Estate Home Loans at (714) 547-1083.

 
7. HOW CAN I FIND OUT MORE ABOUT CANCELING PMI? The following websites provide more information:

moneycentral.msn.com/articles/tax/capitol/3314.asp
www.house.gov/hansen/consumrq.htm
www.mispecialists.com
www.salesonline.com/ijams/pmi.htm

If you would like to obtain regular updates on real estate laws which affect you or need legal representation in any real estate matter in Southern California, call Darren Gordon Smith, a Professional Law Corporation today at (714) 505-2700.

DISCLAIMER: THE ABOVE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND SHOULD NOT BE CONSTRUED AS LEGAL ADVICE. REAL ESTATE LAWS ARE COMPLEX AND CONSTANTLY CHANGING. AS ALWAYS, YOU SHOULD FIRST SEEK THE ADVICE OF AN ATTORNEY TO FIND OUT HOW CERTAIN LAWS MAY AFFECT YOUR SITUATION.