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Lender must inform buyer up front if PMI is required


Dear Mr. Azrael,

I am currently in a dispute with my lender over private mortgage insurance (PMI).

I purchased my townhouse in November 1998 and did so with nothing down and an 80 percent [loan-to-value] first mortgage and a 20 percent second mortgage.

Only recently, when considering refinancing, was it brought to my attention that I have been paying PMI and no one can figure out why. I was under the impression that the whole reason for splitting a loan ... was to avoid PMI.

I sent a letter requesting the PMI be dropped from future payments as well as a refund of previous payments. The bank said the PMI is very low because of the 80/20 as opposed to a 100 percent single loan. PMI is $27.01 per month, but it still adds up.

I consulted an attorney who ... suggested that the response that I received was unsatisfactory and I should write again. I did [but] have received no response so far.

Additionally, my 20 percent second [mortgage] is a 30-year note with a five-year balloon. I have been paying additional money to pay the loan off at the end of five years and had to correct the bank in applying my extra principal, which they were applying several times over two years as "pre-paid interest."

Any insight into this matter would be greatly appreciated.

Mike Gilberg


Dear Mr. Gilberg:

First, let's go over why PMI exists in the first place. PMI insures mortgage lenders against loss if the borrower defaults on a residential first mortgage loan.

Lenders normally require PMI if the loan is for more than 80 percent of the value of the home, as determined by the lender. The cost of PMI can vary from about three-quarters of a percent of the loan for loans with 5 percent down to about one-quarter of a percent for loans with 15 percent to 20 percent down. PMI is typically paid monthly.

Lenders must send borrowers an annual notice advising them of the right to terminate PMI.

The first place to look to discover if PMI was improperly charged on your loan is your loan documents. Your lender should have advised you in writing that PMI was being charged and the amount of your monthly PMI payments. If your lender did its paperwork correctly, you should have signed several documents at or before settlement that disclosed information about PMI.

Your lender cannot obligate you to pay PMI without telling you up front. If you were not properly advised about PMI, you may have the right to avoid further charges and recover past PMI payments.

Without reviewing your loan documents, I can only guess as to why your lender required PMI. Perhaps your first mortgage loan slightly exceeded 80 percent of the purchase price. The lender should be able to explain why it required PMI.

Since you have paid on the loan for two years, the lender also should be able to tell you when you can terminate PMI. You may be able to accelerate termination by refinancing your second mortgage for enough money to pay down the first loan by the amount required to eliminate the PMI requirement.

Under Fannie Mae guidelines, borrowers with mortgages originating before July 29, 1999, may terminate PMI when their principal balance is reduced to 80 percent of the home's value, provided they haven't paid their mortgage late.

I hope this information will enable you to solve the mystery of why you're paying PMI and how you can end these payments.

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