Federal Law Cancels Private Mortgage Insurance

Question: I was told that under federal legislation passed in 1999, private mortgage insurance is canceled automatically at some point--borrowers don’t have to do anything. Is that right?

Answer: Yes. Under one provision of that law, lenders are required to cancel private mortgage insurance on most home mortgage loans made after July 29, 1999. Cancellation will occur automatically when amortization has reduced the loan balance to 78% of the value of the property at the time the loan was made.

But under another provision of this law, lenders must terminate insurance at the borrower’s request when the loan balance hits 80% of the original value. Borrowers who take the initiative can terminate earlier than those who wait.

Even under this provision, the wait can be a long one. With normal amortization, it takes 142 months for the loan balance on a 8% 30-year loan equal to 95% of property value to fall to 80%. A 15-year loan that is otherwise identical will get there in 47 months.

But borrowers who add to their regular monthly payment will reach the 80% target more quickly. If they add 1/12 of the payment every month--for example, a $600 payment is raised to $650--the mortgages cited above will hit the 80% target in 91 months and 38 months, respectively.

The lender need not accept your request for cancellation if:

* You have a second mortgage.

* The property has declined in value.

* You had a payment late by 30 days or more within the year preceding the cancellation date, or late by 60 days or more in the year before that.

If your loan was made before July 29, 1999, this law does not cover you. If it was sold to Fannie Mae or Freddie Mac, however, you are subject to the cancellation rules of the agencies, regardless of when the loan was made. And these rules are more favorable to homeowners because they are based on the current appraised value of the property rather than the value at the time the loan was made.

Under these rules:

* You can terminate after two years if the loan balance is no more than 75% of current appraised value, and after five years if it is no more than 80%.

* You must request cancellation, and obtain an appraisal acceptable to the agencies and to the lender.

* The ratios required for termination are lower if there is a second mortgage, if the property is held for investment rather than occupancy, or if the property is other than single-family.

* The agencies will not accept termination if your payment has been 30 days late within the prior year, or 60 days late in the year before that.

Using current value rather than original value can substantially shorten the period to termination. For example, the 30-year 8% loan that takes 142 months to reach 80% of original value will get there in 96 months with just 1% annual appreciation, and in 53 months with 3% appreciation.

If your loan was made before July 29, 1999, and if it is not held by Fannie or Freddie, the termination rules that apply are those of your lender. In some states (including California), lenders’ rules may be affected by state law.

The best strategy is to assume you are subject to the liberal Fannie/Freddie rules. After two years, begin periodically to estimate the ratio of your loan balance to current value. Web sites offering helpful tools include Homegain.com, Dataquick.com, Propertyview.com and Domania.com.

When it appears that you might meet the agencies’ requirements, contact your lender and ask whether your mortgage is held by one of the agencies. If it is, confirm the ratio of balance to current value that permits termination in your case.

If your loan isn’t held by one of the agencies, ask the lender for a written statement of its own termination policy. If your loan was made after July 29, 1999, follow the more liberal of the lender’s rules or the federal law. If your loan was made before July 29, 1999, you are stuck with the lender’s rules.