Loan servicers have a history of collecting these payments even after the insurance should no longer be required. Here's how to make sure you don't overpay.
It’s illegal to keep charging homeowners for private mortgage insurance after the date when a policy should be automatically canceled. But the mortgage insurance industry apparently needs to be reminded, and this should serve as a red flag for consumers.
“Consumers should not be billed for unnecessary private mortgage insurance,” Consumer Financial Protection Bureau Director Richard Cordray said, in an August announcement. The bulletin implies, but doesn’t say outright, that some PMI companies or mortgage service firms are continuing to collect borrowers’ premiums even after their policies should be canceled.
Not a new problem
The bureau — which identifies “substantial industry confusion” over canceling PMI — does not say how widespread the problem is or how much money they are not entitled to that companies have taken from homeowners. Unfortunately, this problem is not a new one. Money Talks News founder Stacy Johnson has long warned homebuyers to keep an eye on their PMI to make sure it is canceled in a timely manner.
PMI overcharging has been such a long-standing problem that in 1998 Congress passed the Homeowners Protection Act (explained here by the Federal Reserve) forbidding the practice. That didn’t stop it, though. Since 2013 the CFPB has issued three bulletins, reminding mortgage insurers and servicers to stop collecting premiums after borrowers’ obligations are paid.
Those bulletins apparently didn’t do the trick either. The Washington Post wrote last year about one loan servicer that used an invented requirement to prevent a homeowner from canceling a policy. The CFPB this year uncovered new violations, leading it in August to issue Cordray’s remarks and a bulletin with “guidance,” attributing the problem to industry confusion while politely but firmly reminding servicers to “comply with the law.”
Paying for unnecessary PMI is a serious burden for homeowners. “If a servicer does not cancel a borrower’s private mortgage insurance promptly, it can lead to the borrower paying significant amounts of money on unnecessary premiums,” the CFPB says. No kidding. On a $300,000 mortgage homeowners could pay from $900 to $4,500 (0.3 percent to 1.5 percent of the loan value) a year.
PMI sounds like a consumer benefit, but it protects lenders, not borrowers. When buying a home you typically must contribute some cash to the deal in the form of a down payment, besides taking out a loan. Borrowers who make smaller down payments historically default on mortgages at higher rates, as the Center for Economic Policy Research explains. That’s why, with a down payment of less than 80 percent of the home’s price, you are required to buy PMI to protect your lender against that risk.
Stacy explains, in Ask Stacy: When Can I Stop Paying Mortgage Insurance:
PMI is typically required unless you have at least 20 percent equity in your home, also known as an 80 percent loan-to-value (LTV) ratio. For example, if your home is worth $100,000 and you owe $80,000, you have an 80 percent LTV and 20 percent equity.
FHA mortgages have different mortgage-insurance requirements, as Stacy also explains in the article.
You don’t need PMI forever
The monthly PMI premiums are added to your mortgage payment. Your insurance company is supposed to cancel them automatically at the point when your principal balance is scheduled to fall to below 78 percent of the home’s “original” (when you bought it) value.
You’ll find your cancellation date in a PMI disclosure form you received when signing the mortgage. If you can’t find it, ask your lender for the date.
If your PMI isn’t canceled automatically you can request to have it canceled. Also, you can request cancellation if you made extra payments to the mortgage balance that bring it to 80 percent early.
Here’s what’s required to request cancellation:
- Be up-to-date on your home payments.
- Make the request to cancel PMI in writing. (Keep a copy for yourself.)
- If the insurance company requires it, you may have to provide evidence that there are no second liens on the home, such as a second mortgage, home equity loan or home equity line of credit.
- If the insurance company requires it, you may have to pay for an appraisal to show that the home’s value isn’t less than when you bought it.
- On the flip side, if you think your home has appreciated significantly (through upgrades or rising values in your area), it might be worth getting an appraisal to show that your equity has increased as a consequence. One Redfin contributor, “BeachVBall,” tells how he canceled his PMI by showing the lender that his loan-to-value ratio had shrunk, given his home’s appreciated market value. This let him escape the cost of PMI sooner than if he had just let the process run its course.
If you are having trouble with your mortgage insurance company or mortgage servicer, make a complaint to the CFPB. The bureau should follow up, contact the servicer promptly and try to settle the problem. File a complaint online or phone 855-411-2372.
“We will continue to supervise mortgage servicers to ensure they are treating borrowers fairly, and today’s guidance should help servicers come into compliance with the Homeowners Protection Act,” Cordray said in the announcement.
Have you paid mortgage insurance? Share your experience with us in comments below or on our Facebook page.