If you have less than a 20% down payment when you purchase a home, you most likely will be required to purchase private mortgage insurance or PMI. PMI protects the lender on a conventional mortgage in the event the borrower defaults and the lender forecloses on the property. The premium for PMI is paid by the borrower and may be canceled once certain conditions are met. There are other variations of this type of insurance that may not be canceled if the mortgage is backed by the Federal Housing Administration (FHA) or the Department of Veterans Administration (VA).
Your lender is required to notify you on an annual basis that it is possible to cancel PMI. This notification is often included with the information regarding the amount of interest you paid on the mortgage and the disbursements from your escrow account. There should be an address and telephone number to contact the lender along with the toll free number 1.800.252.3439 for the Texas Department of Insurance (TDI). The lender is your best source for details regarding what is necessary to cancel PMI. TDI does not maintain mortgage information.
The cost of PMI can be anywhere from ½ of 1% to almost 6% of the principal amount of the loan depending upon the down payment, the type of loan (fixed or adjustable interest rate), and term of the loan, as well as borrower's credit score(s).
Two different laws regarding the cancellation of PMI are:
- Texas Insurance Code, §§3502.201 - 3502.203 - Lender Powers and Duties (formerly Article 21.50, Sec. 1B), which is applicable to conventional mortgages effective prior to July 29, 1999; and
- The federal Homeowners Protection Act of 1998 - US Code, Title 12 - Chapter 49 ( §§4901-4910) which is applicable to some mortgages effective July 29, 1999 or later.
Conventional Mortgages Prior to July 29, 1999
For a conventional mortgage that was effective prior to July 29, 1999, and has not been refinanced, Texas Insurance Code, §§3502.201 - 3502.203 (formerly Article 21.50, Sec. 1B) requires:
(a) A lender that requires a borrower to purchase mortgage guaranty insurance shall provide annually to the borrower a copy of the following written notice printed in at least 10-point bold-face type:
"NOTICE OF RIGHT TO CANCEL PRIVATE MORTGAGE INSURANCE: If you currently pay private mortgage insurance premiums, you may have the right to cancel the insurance and cease paying premiums. This would permit you to make a lower total monthly mortgage payment and to possibly receive a refund of any unearned premiums on the policy. In most cases, you have the right to cancel private mortgage insurance if the principal balance of your loan is 80 percent or less of the current fair market appraised value of your home. If you want to learn whether you are eligible to cancel this insurance, please contact us at (address and telephone number of lender) or the Texas Department of Insurance consumer help line at (the appropriate toll-free telephone number)."
As noted above, in most cases borrowers have the right to cancel private mortgage insurance if the principal balance of your loan is 80 percent or less of the current fair market appraised value of your home. However, many lenders now seek having the principal balance reduced to 78% (rather than 80%), which has been suggested by Fannie Mae if you reside in the home, and from 65 to 70% for rental property. An appraisal will probably be required to cancel PMI. You may want to consider the valuation of similar properties in your neighborhood before expending the cost for a professional appraisal. Contact your lender first to determine what is required.
Conventional Mortgages on or After July 29, 1999
Conventional mortgages effective July 29, 1999 or later are subject to the Homeowners Protection Act of 1998 (Act) which contains the following definitions:
There are provisions regarding an automatic "termination date" based solely on the amortization schedule for the mortgage. According to the amortization schedule, termination of the PMI would occur when the principle balance of the mortgage, irrespective of the outstanding balance, is first scheduled to reach 78% of the original value of the property securing the loan. An exception to this would be for a high risk loan (as described in Chapter 49, Sec. 4902, (g)) where the principal must be reduced to 77% of the original value.
An option is also available for a "cancellation date" when the amortization schedule reaches 80% or the principal is paid down to 80% of the original value. You should obtain a copy of the amortization schedule from the lender, if this was not provided at closing.
Additional information regarding termination of private mortgage insurance can be found at http://uscode.house.gov Title 12 - Chapter 49.
Complaints
Complaints regarding the lender refusing to have the insurance company cancel PMI after the required criteria has been met should be directed to the appropriate regulatory agency. The Texas Department of Banking regulates state banks, and has an excellent Regulator Referral List which can be found on its website at www.dob.texas.gov. Click on the "Consumer Assistance." If your complaint does not involve a state bank, click on "Entities Not Supervised." Included on this list is the Texas Office of the Attorney General, Consumer Protection Division, in case you are unable to determine who to contact.
For mortgages obtained through the Farm Credit System, please contact the Farm Credit Administration at www.fca.gov and then select "Borrowers Rights."
If you have any other questions, please do not hesitate to contact the Property and Casualty Lines Office of the Texas Department of Insurance at 512.676.6710 or PropertyCasualty@tdi.texas.gov.