Lender can't arbitrarily change terms of its PMI requirement


July 19, 1998

Dear Mr. Azrael:

My question is regarding the PMI (private mortgage insurance) and whether the mortgage company can increase the rate from 20 percent equity to 25 percent equity after the loan is made.

-- Jim Jackson

Ellicott City

Dear Mr. Jackson:

Private mortgage insurance is required by many lenders when a borrower obtains a mortgage loan that exceeds 80 percent of the value of the property. If the borrower defaults, the insurance protects the lender against loss for an amount ranging between 12 percent and 35 percent of the loan, depending on the loan-to-value ratio.

"Value" is normally set at the lower of the sales price or appraised value. For example, if you refinance your property and borrow 95 percent of the appraised value, the lender may require PMI for 30 percent of the loan. Similarly, if you purchase a home for $100,000 and borrow $95,000, the lender may require you to purchase PMI for 30 percent of the loan.

According to Rich Green, vice president of Freestate Mortgage Co., many lenders now offer loan programs that avoid PMI. These programs combine a first mortgage loan for 80 percent of the value with a second mortgage of an additional 10 percent or 15 percent of the value. The net cost to the borrower is usually less than a loan insured by PMI.

Lenders are required to disclose the cost of PMI in a "good faith estimate" of loan costs, furnished to the borrower at the time of the loan application. A lender cannot arbitrarily increase the cost of PMI or increase the portion of the loan which is insured after the loan is made.

Congress is considering legislation to require lenders to terminate PMI premiums when the borrower has paid the loan down to a specified equity "trigger" level.

In Maryland, state-chartered banks and savings and loan associations are required to automatically eliminate all charges for PMI for first mortgages on residential property when the mortgage principal is reduced to the level at which the insurance company is no longer liable. But many borrowers continue to pay PMI premiums because their mortgage lender or insurer has no legal duty to tell them they can stop.

Your question implies that your PMI premium would have to be paid until you have reduced the loan principal to 80 percent of the home value at the time of the loan. Now, you have been advised that the PMI premiums will continue until you have paid the loan down to 75 percent of the original value, giving you a 25 percent "equity."

The lender cannot arbitrarily change the terms of its PMI requirement. Conceivably, the lender failed to compute the PMI premium properly and is trying to adjust the PMI after the fact.

You are entitled to a complete explanation from the lender or PMI insurer. You should not agree to change the terms of the PMI unless you are satisfied that you are legally obligated to do so.

Pub Date: 7/19/98

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