What Is the Homeowners Protection Act?

FT Contributor
An insurance agent grasping a graphic of a home with a lock in the middle of the graphic.

The Homeowners Protection Act (HPA) or PMI Cancellation Act protects homeowners from overpaying for private mortgage insurance (PMI). Prior to the act’s passing in 1998, homeowners experienced problems with canceling PMI and had limited remedies if the lender refused to cancel coverage.

For an individual paying $1,000 per year on PMI coverage, delays in terminating the monthly premiums add up to a considerable amount of money wasted in unnecessary charges. The PMI Cancellation Act protects homeowners by prohibiting PMI coverage for the life of a mortgage and by establishing clear procedures for canceling a homeowners mortgage insurance policy.  

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Home Ownership and Equity Protection Act

The Act helps borrowers avoid unnecessary coverage payments, but what does the HPA mean in more detail? Here’s a closer look at the Homeowners Protection Act of 1998 and how it could help you save money:

Homeowners Protection / PMI Cancellation Act Definition

The HOPA (or HPA) applies to residential mortgage loans. The provisions do not cover government-backed loans such as VA or FHA loans because government-issued mortgages don’t require private mortgage insurance.

The HOPA or PMI Cancellation Act addresses the difficulties homeowners have had in the past when attempting to cancel homeowners mortgage insurance coverage. It limits the confusion a borrower faces about how long they must pay for the insurance by establishing uniform guidelines for canceling and terminating private mortgage insurance payments. HOPA also sets disclosure and notification requirements about private mortgage insurance and requires lenders to return unearned premiums.

Why Is PMI Cancellation Important?

PMI is one of the costs of homeownership, although not everyone is required to have mortgage insurance coverage. A borrower must pay for private mortgage insurance when they make less than a 20 percent down payment towards a home purchase and finance the home using a traditional home mortgage. The additional PMI expense doesn’t benefit the borrower — it protects the lender in case the borrower doesn’t continue to pay the loan.

Homeowners must continue to pay for PMI until they finally reach 20 percent of the loan paid. Considering that homeowners mortgage insurance costs between 0.3% to 1.15% of your home loan, you may be paying as much as $287.50 per month in mortgage insurance for a $300,000 mortgage.

The HPA recognizes a homeowner’s difficulty in knowing when they no longer need coverage or wish to cancel it. To avoid overpaying for PMI, time is of the essence to terminate coverage you’ll no longer need and the PMI Cancellation Act has guidelines for the process.

What Does the HPA Do?

The Homeowners Protection Act protects borrowers from predatory lending practices related to PMI by prohibiting coverage payments over the life of the loan. The Consumer Financial Protection Bureau (CFPB) has been given the authority to watch over lenders and enforce compliance of the rules set forth.

The Act sets uniform guidelines that address:

  • When homeowners can cancel PMI;
  • How a borrower can initiate the cancellation;
  • When lenders must stop automatically charging for PMI;
  • What disclosures lenders must provide when a loan requires PMI;
  • How and when to return premiums paid by the homeowner that are unearned;
  • How the Consumer Financial Protection Bureau will investigate and enforce the HPA regulations;

An important aspect of the Homeowners Protection Act is disclosure. Lenders must inform borrowers about their rights upon purchasing a home and annually explain when and how a borrower can cancel private mortgage insurance. They must provide an amortization schedule and clearly explain in writing when a consumer can request PMI cancellation.

How to Seek Help With PMI Cancellation

If you’d like to explore whether you’re eligible to cancel your PMI payments to save on the monthly premiums, there are several steps you should take:

  • Determine your eligibility to cancel PMI: Borrowers who make their loan payments on time can cancel PMI once the loan is scheduled to reach an 80% loan-to-value (LTV) ratio. Homeowners are also eligible for cancellation if they have made extra loan payments that have brought the LTV down to 80%.
  • Learn how to submit a cancellation request: A borrower has the right to request cancellation of PMI in writing. Include your account number, the reason why you believe you’re eligible to cancel, and supporting documentation with your written request.
  • Know how automatic PMI cancellation works: Lenders are required to automatically cancel PMI once the loan reaches 78% of the original LTV. For loans before the Act’s 1998 inception where no request to cancel was submitted, lenders must cancel monthly PMI charges when the loan reaches the halfway point of its amortization schedule.
  • Seek out additional PMI cancellation provisions: Individual lenders may have their own guidelines, but they cannot restrict HPA mortgage protections. Other cancellation provisions that may hinder your ability to cancel PMI include having liens on your property or having a nonconforming loan which requires reaching 77% LTV before being eligible to cancel.

Canceling homeowners mortgage insurance can save you money every month, but there are other ways to lower your monthly mortgage payments. Knowing how the Homeowners Protection Act works and what your rights are when it comes to private mortgage insurance can save you money over the life of your loan.

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