What is the Homeowners Protection Act?
The Homeowners Protection Act (HPA), also known as the PMI Cancellation Act, is a 1998 federal law that affords homeowners certain protections when canceling private mortgage insurance (PMI). It also creates other regulations related to the lending process.
The HPA only covers private loans and does not regulate government-backed loans, such as VA loans. For people who take private loans, many of them are required or opt to purchase PMI, only to find out that they no longer need it later on. The HPA provides regulation in the process of purchasing and canceling PMI so that homeowners can avoid paying these unnecessary costs.
What is Private Mortgage Insurance?
PMI is typically only required when a home buyer plans to pay less than the standard 20% upfront. This makes lending to those who cannot afford the high initial costs a lot less risky and more worthwhile to do.
Paying for PMI can come in many forms, including paying an extra monthly premium on the mortgage, paying a 1-time sum at the beginning of the mortgage, or raising interest rates on the loan. No matter how the buyer chooses to pay, all forms of PMI are subject to HPA regulation.
How Does the HPA Regulate Private Mortgage Insurance?
Before the passage of the HPA, many lenders would make their customers aware that PMI is not required for the entire duration of the loan, yet there were difficulties for homeowners when trying to cancel it, many of whom were ignorant to the fact that they could do so. The HPA made it so lenders must do the following regarding PMI:
- Tell homeowners when they are eligible to stop paying PMI premiums
- In some instances, automatically stop charging PMI premiums even if the homeowner has not canceled it
- Makes lenders only provide loans where homeowners stop paying PMI after a certain period of time
- Disclose when a loan requires PMI and any information on how to cancel it or what may prevent them from canceling it
Can I Cancel My Private Mortgage Insurance?
The HPA makes it so nearly all homeowners can cancel their PMI once the loan-to-value (LTV) reaches 80%, meaning that their equity must reach 20%. You can send a written request to your lender once you reach this number, and they are legally required to cancel your PMI barring other extenuating circumstances.
Once the LTV reaches 78% your lender is legally required to cancel your PMI automatically, even if you have not requested it. It is generally a good idea to keep track of the equity you have accrued and cancel PMI at 80%, not just because you are losing out on money, but because there are circumstances where the lender may be able to charge PMI past 78% LTV. For example, liens on your property may allow a lender to keep charging PMI.