What Is the Homeowner's Protection Act?
Your Right to Cancel PMI
Private mortgage insurance (PMI) protects lenders when borrowers don’t repay home loans, but homeowners are responsible for paying mortgage insurance premiums. Those costs can come in the form of monthly charges added to a mortgage payment, or they can be baked into the borrower’s interest rate. Either way, consumers benefit by paying only as much as necessary for mortgage insurance.
Unfortunately, homeowners have faced challenges eliminating PMI charges, even when PMI was no longer required.
In some cases, borrowers and servicers were confused about how to cancel PMI, and some unscrupulous loan servicers dragged their feet on canceling PMI charges.
What Is the Homeowner’s Protection Act?
The Homeowner’s Protection Act (HPA), also known as the PMI Cancelation Act, is a law that protects consumers from overpaying for PMI. The rules establish:
- When homeowners can cancel PMI and stop paying premiums
- When lenders must automatically stop charging borrowers for PMI
- Disclosures that lenders must provide when a loan requires PMI
- How to handle unearned premiums that homeowners pay
Who qualifies? The HPA applies to residential mortgage loans, including loans for single-family homes, condos, and other multi-unit residential housing. The Act does not cover government-backed loans like FHA loans or VA loans. What’s more, the HPA treats conforming loans and “high-risk” loans differently. To take advantage of the HPA, consumers need to maintain a good payment history.
Effective date: The HPA became effective on July 29, 1999. However, lenders still need to provide disclosures to borrowers who took out loans before that date.
Why PMI? PMI is typically only required when homeowners make a down payment of less than 20 percent. With a high loan-to-value (LTV) ratio, lenders risk losing money if they have to foreclose on a home and sell it quickly.
But once the LTV drops below 80 percent, lenders face much less risk, and homeowners—in theory—should stop paying monthly PMI charges.
How Homeowners Cancel PMI
The HPA prevents situations where homeowners pay monthly PMI charges for the life of their loan.
Borrower request: Borrowers can cancel PMI by submitting a written request to their loan servicer once the loan is scheduled to reach 80 percent LTV (based on the loan’s amortization schedule). Homeowners can also make this request if they bring the LTV down to 80 percent by making extra loan payments. To qualify, homeowners may need to provide proof that the property has not lost value.
Automatic termination: Lenders are required to cancel PMI coverage automatically once the loan is scheduled to reach 78 percent of the original LTV.
Final termination: When PMI does not get canceled due to borrower request or automatic termination, loan servicers must cancel monthly PMI charges after the loan reaches the halfway point of its amortization schedule.
Other features: The HPA is complicated, and the details of your loan affect your rights under the Act. For example, any liens on your property may prevent you from successfully canceling coverage.
Nonconforming loans (such as jumbo loans) might require you to wait until you get to 77 percent LTV.
Disclosure: Your Rights as a Borrower
In addition to setting rules for canceling PMI, the HPA requires lenders to inform borrowers about their rights. Disclosures include up-front and annual notices regarding when and how borrowers can cancel PMI. Information includes details about the amortization schedule, when to request cancelation, and any features that limit the ability to get PMI canceled.
For existing loans issued before July of 1999, borrowers get an annual notice reminding them that they can request cancelation and providing their loan servicer’s contact information.
Lender Paid Mortgage Insurance
Some loans use lender paid mortgage insurance (LPMI) instead of adding premiums to the homeowner’s monthly payment.
Borrowers still pay for LPMI—the name is not entirely accurate—but they don’t pay for it month-by-month. Instead, borrowers can pay either:
- A lump-sum payment at the beginning of the loan.
- A higher interest rate on the loan balance, which leads to higher monthly mortgage (principal and interest) payments.
Most borrowers with LPMI opt for the higher interest rate. But that interest rate lasts for the life of the loan, and there is no way to “cancel” LPMI and keep your existing loan. Instead, homeowners need to pay off their LPMI loan, typically by refinancing with a new loan.
Still, the HPA applies to loans with LPMI. Lenders are required to provide disclosures to borrowers that:
- Explain how LPMI works
- Highlight the higher interest rate typically found with LPMI
- Discuss the pros and cons of different options