Q: We are paying PMI on our mortgage and would like to make a prepayment to get rid of it. On our closing documents it says the lender will cancel PMI after our loan has been paid down to 78% of the original property value. I talked to the company servicing our mortgage and they said we would have to satisfy 78% of the original loan value before they would cancel our PMI. Their reasoning was because PMI insures the mortgage not the home. The representative I spoke with seemed uncertain with her answers so I was looking for insight to whether the PMI should be dropped at 78% of original property value or loan value.
A: The answer to your question is in your mortgage documents, which refer to a clause in the Homeowner Protection Act of 1998, a law which governs the cancellation of PMI (among other things). A primer of the law can be found at http://www.frbsf.org/publications/consumer/pmi.html, the website of the Federal Reserve Bank of San Francisco; in it you'll find details on how to initiate cancellation in the proper fashion.
In the law, there are provisions for automatic as well as borrower-initiated cancellation. For the most part, you can request cancellation if your loan is more than two years old and you have an equity stake greater than 20%. The 78% level is a mandatory trigger and should be based upon the original value -- defined in the act as "the lesser of the property's sales price or the appraised value when the mortgage was created" -- of your home and the original mortgage amount. For certain loans or if you have late payments, the lender can wait until a 77% level is reached.
For the specific language of the law, lender and consumer guides from various agencies and more, do a web search for "homeowner's protection act of 1998". You may need to be persistent in order to get what you want but the law is on your side on this one.
