Takeaways:
- Borrowers with low down payments must pay for private mortgage insurance (PMI).
- Lenders don’t always inform their borrowers that their PMI payment plan has ended.
- A new Tactile Finance website feature allows consumers to calculate when their PMI payment should end on their own.
A compliance bulletin recently issued by the Consumer Financial Protection Bureau (CFPB) directing mortgage servicers on the proper way to charge homeowners for private mortgage insurance (PMI) has provided a new opportunity for Tactile Finance, a Web-based technology company that provides homeowners with a “360-degree view” of their mortgages.
Although most homebuyers are advised to make a 20 percent down payment on their home purchase, some loan programs allow them to make a smaller down payment. These homeowners are required to pay for private mortgage insurance, or PMI, to protect their lenders in the event they default on their mortgages.
Borrowers are charged monthly for PMI, which can range between 0.05 and 1 percent of their loan amount. For example, if a buyer obtains a $400,000 loan, his PMI payment would be about $200 extra per month, or $2,400 per year.
And the trend of borrowers making smaller down payments and purchasing PMI is on the rise. According to LendingTree, loans with down payments between 5 and 10 percent accounted for almost a fifth of the conventional loan offers that lenders made on the LendingTree online exchange in the first quarter.
Zillow Mortgage also estimates that the number of lenders quoting non-FHA loans with down payments of 5 to 10 percent is almost double what it was two years ago.
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However, lenders don’t always inform their borrowers that their PMI payment plan has ended, the CFPB has alleged. Under the Homeowners Protection Act of 1998, lenders are required to cancel PMI when the loan-to-value ratio drops to 78 percent.
“While some lenders would terminate PMI coverage when a borrower reached a certain level of equity in the property, other lenders would keep PMI coverage in place for the life of the loan, and borrowers often had trouble determining their lenders’ PMI cancellation standards,” the CFPB stated in its recent bulletin, which identified how this trend is providing opportunity for fraud.
But it’s also creating an opportunity for Tactile Finance to “help consumers see and understand home financing with no fine print,” said Nicole Hamilton, the company’s CEO.
“We want to make the mortgage transaction transparent and consumable,” Hamilton said. “The guidance from the CFPB touches on a lot of issues we actually recognized earlier about consumers not understanding private mortgage insurance.
“The problem with PMI is it has a formula, where the payments are supposed to come off at a certain time. It has always been a bit of a mystery to consumers about when it does come off, and honestly, it’s not exactly in the best interest of the mortgage company to tell you, ‘It is time for us to charge you less.’”
Tactile Finance’s website already gives consumers a real-time picture of their home financing options, mortgage payments and fees, and equity, but the company has added a new feature to its Current Mortgage page that gives consumers a visual way to be able to tell, with any type of loan, when their PMI should be removed, according to the rules described in the CFPB’s bulletin.
“It lets anyone using our tools enter in loan information, PMI amount, and see where in time it should come off, and what the impact is on their finances, so they can plan better,” Hamilton said. “This puts control in the consumer’s hand and lets them know if they are making payments they shouldn’t have to. Without this capability, they might spend hundreds if not thousands of dollars they shouldn’t have to, if their company makes an error in removing it, or simply doesn’t notify them.”
The feature is also available on Tactile Finance’s Refinance page to show when PMI should come off in the context of an overall refinance decision.
“By making it available in our other products, like for real estate, credit unions, investment advisers, it spreads the knowledge around to more consumers,” Hamilton said, adding, “Our loan officers we tested this with love this feature because they can show people something other loan officers can’t, and provide better service, differentiate themselves. It also takes the burden of having to explain this, which can take a while, and speeds up the conversation.”