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The Homeowners Protection Act of 1998 (the Act) home owners the right of cancellation of Private Mortgage Insurance premiums (PMI). What is Private Mortgage Insurance? Private mortgage insurance is required by lenders to protect their interests in property that is not secured by a large enough down. If the borrower defaults on the note, then the lender gets his investment back. The down payment required to avoid PMI is normally about 20% of the value of the home. If you have a Federal Housing Authority (FHA) loan or a Veteran’s Administration (VA) loan this does not apply to you. These two loans are exempt from the down payment requirements and the PMI requirements because they are back by the federal government. If you have another type loan then once you have 22% invested in the home you can ask for the PMI requirement to be dropped.

How to Calculate Private Mortgage Insurance? Because of the Act more people know about PMI. There are more people qualified to take out mortgages on homes because there is not as much money required for the down payment. Prior to the Act buyers had to have 20% of the home. The Act was passed so that more people could participate in home ownership without having to come up with such a large down payment. Now a buyer can obtain a loan on as little as 2% to 5% down. The PMI was enacted to encourage lenders to take a risk on these borrowers who did not have the 20% down. However, the Act also made provision for cancellation of the PMI when the equity in the home reaches 22%.

Lenders are required by the Act to educate the borrower about PMI and to notify them at closing, each year following closing, and when the insurance is cancelled. The lender must inform the buyer the qualifications that will release the buyer from carrying PMI. At 20% equity in the home, the buyer can ask for the lender to cancel PMI. There are conditions to this approval. The lender will cancel PMI automatically at 22% equity.

The conditions for release at 20% of equity have to be satisfied before the lender is required to release the PMI. PMI is only for residential properties. The buyer must live in the home and it must be considered single family. Some exemptions are high risk loans or high risk mortgages. These must be identified in the original paperwork to meet the considerations. If you have maintained a good payment history with the lender you can ask for PMI to be discontinued at 20% equity in the home. A good payment history is defined as no late payments in the prior year, no payments more than 30 days late, and all payments are current on the note. You cannot have been more than 60 days late in the prior two years. If your home has decreased in value or you have a second mortgage on the home, you will not meet the 20% equity requirement and the request will be denied.

The automatic cancellation by the lender comes into effect when the borrower has paid down the principal to 22% of the value of the home. You must still meet the requirements of being current on the mortgage to qualify. If you are not current and the lender is going to require PMI for a longer period of time then the automatic cancellation is extended to 50% of the value of the home. If you have a 360 month or 30 year note, you would reach the half way point when you have paid for the note for 15 years.

This article written by Jeanie Nino. Her blog: mortgage calculator with taxes and mortgage calculator with taxes and insurance