Private mortgage insurance, or PMI, insures the lender against a borrower's default. It helps the lender in situations when a foreclosure sale might not bring enough money to pay off both the mortgage and the cost of the foreclosure. It is only required when the borrower is making a cash down-payment of less than 20 percent of the purchase price. The PMI premiums are usually then added to the borrower's monthly payment. The loan servicer collects the monthly premium and pays it to the PMI insurer.
The first year's mortgage insurance premium is usually paid in advance at the close of escrow, and there will usually be a separate PMI approval process.
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The Homeowners Protection Act states PMI must be dropped on any loan originated after July 29, 1999 IF it has a 78 percent loan-to-value ratio.
Important Note: the Mortgage Debt Cancellation Relief Act extends the PMI deduction mortgage insurance premiums through tax year 2010.
In Ohio, disclosure laws require lenders to notify borrowers after the close of escrow whether the borrower has the right to cancel private mortgage insurance. Under the new federal law - The Homeowners Protection Act - lenders must drop PMI if the loan closed after July 29, 1999 AND the loan to value ratio reaches 78 percent of the home's original market value. See the resource listed below for a full discussion of the HPA Law and how it may apply to you.
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