Often Maligned Private Mortgage Insurance Helps Opens Door To Home Ownership

Shaking off a bad rap after years of errant lenders failing to cancel private mortgage insurance (PMI) when the coverage was no longer necessary, the PMI industry is becoming more consumer friendly by extolling the virtues of the often misunderstood coverage.

Private mortgage insurance is required on most low-down payment mortgages and without it two of the five home buyers who use it may not otherwise be able to buy a home, according to the Mortgage Insurance Companies of America, the industry's trade group.

"The benefit is that if they want to put less than 20 percent down or they just don't have 20 percent down, they are not shut out of the housing market," said Glen Corso, spokesman for PMI Mortgage Insurance Co. in San Francisco, one of eight companies that comprise the industry.

Offering a new Web site for consumers called privatemi.com the industry also says alternative low-down payment mortgage financing methods generally cost more and remain a financial burden longer than private mortgage insurance.

What is PMI?

Required on most loans with down payments of less than 20 percent, PMI protects lenders from borrowers defaulting on the mortgage. Mortgage industry studies reveal that borrowers making smaller down payments are more likely to default than those with larger down payments.

The insurance, however, carries no protection for borrowers who must pay the premiums which are not tax deductible. (Fannie Mae did recently announce it's reducing the cost of PMI required on the loans it buys.)

Federal law mandates that when a lender writes a mortgage it must disclose PMI details, including how and when borrowers can cancel PMI. Years down the road, however, when PMI coverage is no longer necessary, irresponsible lenders haven't always come forward to remind borrowers it could be time to cancel. That has led to many home owners paying hundreds, even thousands of dollars in premiums that were no longer necessary.

In recent years, consumer groups have led a charge of class action suits, new state laws and finally the federal Homeowners Protection Act of 1997, all to provide more consumer protection against PMI abuse. Amending the Truth in Lending Act, the federal law is effective July 29 this year and it forces lenders to automatically cancel mortgage insurance when a homeowner pays down the mortgage to 78 percent of the original purchase price, among other provisions.

The new law does not apply to Federal Housing Administration (FHA) loans, high risk loans and some other mortgages. Check with you lender or broker before you sign on the dotted line to determine if your loan qualifies for PMI cancellation when certain milestones are met.

PMI's benefits

MICA's new Web site tells consumers exactly when and how to get rid of PMI and it details PMI's benefits while you are paying the premiums.

Among the benefits:

Published: February 5, 1999

Use of this article without permission is a violation of federal copyright laws.