One million families or individuals become homeowners each year with the help of private mortgage insurance.
Most of these policies are terminated once the borrower pays a fair amount of equity. However, if you have never requested the cancellation of your private mortgage insurance, if you have not even thought to request cancellation, or if you have been paying it so long that you don't remember what it's for, then familiarity with the Homeowners Protection Act may save you money every month.
The Homeowners Protection Act-signed by President Clinton July 29 and effective one year from that day-addresses the overpayment of private mortgage insurance.
Private mortgage insurance, paid by the borrower, protects lenders from mortgage default risk in cases where the borrower has put less than 20% down on a home.
The average cost of a U.S. home is $165,000. Since most Americans don't have $33,000 (20% of the home's value) for a down payment, private mortgage insurance agencies help them become homeowners by letting lenders make loans that would otherwise be too risky.
The greatest change to be brought on by The Homeowners Protection Act is its mandate that private mortgage insurance agencies must automatically terminate a policy once the loan balance declines to 78% of the original property value. This could save a homeowner $60 to a $100 a month, depending on the loan.
Though private mortgage insurance lets more people own homes, the reform was spurred by the routine overpayment of private mortgage insurance by homeowners.
Take the example of the average U.S. house costing $165,000. Borrowers who made a 5% down payment of $8,250 and had a monthly mortgage payment of $1,096.02 at a 7.5% rate would pay the balance down to 80% of the home's original value after 11 years but may unwittingly continue paying for private mortgage insurance, which would probably cost about $101.89 a month.
Paying private mortgage insurance can sometimes become as routine as making mortgage or utility payments. The borrower is paying monthly invoices on autopilot, without considering that the policy could be canceled. In some cases this overpayment can go on even after the homeowner has paid his or her balance down to 75% or less.
"Mortgage insurance has helped expand homeownership by allowing homeowners to make lower down payments," the President said. "But far too many homeowners continue to pay for mortgage insurance long after they have built enough equity so that the lender has little risk of loss."
A report by Sen. Alfonse M. D'Amato, R-N.Y., a sponsor of the original bill, estimated that 40% of new homeowners buy private mortgage insurance. Many pay their balances down to 80% to 75%, refinance their mortgages, or sell their homes, which often frees them from private mortgage insurance.