New Law Gives Homeowners the Right to Cancel Private Mortgage Insurance

President Clinton has signed into law a bill that, starting next year, will result in considerable savings for many consumers who buy a home with a low down payment but later build up substantial equity in the property. In general, the new law will make it easier for homeowners to cancel private mortgage insurance (PMI). Eliminating those payments could mean savings of several hundred dollars a year. The law will apply to new residential mortgages and mortgage refinancings entered into on or after July 29, 1999.

PMI is an insurance policy that protects the lender from losses when a mortgage with a low down payment goes bad. The lender usually requires PMI if the borrower makes a down payment of less than 20 percent of the home's value. Without PMI, many lenders would be reluctant to make a loan at market interest rates to these borrowers. (PMI is not the same as credit life insurance, which pays off a consumer loan or mortgage if the borrower dies.)

Under the new law, with certain exceptions, PMI automatically will be terminated if the borrower accumulates 22 percent equity in the home and is current on mortgage payments. Also, a borrower with a good payment history may request that PMI be cancelled when he or she has built up equity equal to 20 percent of either the purchase price or the appraised value. The law also requires lenders to inform borrowers of their right to cancel PMI. Prior to the new law, a lender could continue to require monthly PMI payments long after the borrower built up substantial equity in the home and the mortgage lender no longer faced losses from default.

The new law does not cover mortgages under some government mortgage guarantee programs, such as Federal Housing Administration (FHA) loans. Also, some high-risk mortgages are exempt from automatic cancellation.