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Homeowners Protection Act

Candlefocus Editor
The Homeowners Protection Act of 1998 was the first major federal legislation designed to protect homeowners from having to pay for unnecessary private mortgage insurance (PMI). PMI is required on any loan that is not owned or insured by the U.S. government, and is typically needed for borrowers who have less than 20% equity in their homes. The purpose of PMI is to protect lenders from default due to insufficient equity in the property. The annual cost of PMI varies depending on the size of your loan, credit score, and down payment; however, PMI can cost homeowners hundreds of dollars a year.

Under the Homeowners Protection Act, private mortgage insurance companies must provide borrowers with a Mortgage Insurance Disclosure Statement that outlines the loan’s terms and some features of the PMI. It also provides borrowers with the steps to take if they believe their PMI should be cancelled due to having a sufficient amount of equity in their home. Homeowners are only required to pay PMI up until their loan-to-value (LTV) ratio reaches 80%, meaning they have attained at least 20% equity in their home. After this point, they are eligible to cancel the insurance.

The Homeowners Protection Act made it easier for homeowners to cancel their PMI. Homeowners now have the right to appeal if their initial request to cancel is denied. Moreover, the Act requires lenders to automatically terminate PMI no later than the date the mortgage balance reaches 78% of the property’s appraised value at the time the loan was originated.

Unfortunately, PMI cancelation is still not automatic for all loans. Under the Homeowners Protection Act, automatic termination of PMI is only mandated for fixed-rate mortgages. For adjustable-rate mortgages, homeowners must manually request to cancel the insurance and provide proof that their LTV is at 80%.

The Homeowners Protection Act of 1998 has helped many homeowners save money by removing unnecessary PMI payments; however, this does not mean that homeowners should let their guard down. Homeowners should always be vigilant to ensure their PMI is cancelled when it is no longer required. Understanding one's rights under the Homeowners Protection Act is a crucial part of being a responsible borrower.

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