Q: I have enjoyed your column for some time now, and have a question I hope you can answer.
We refinanced our home recently and closed without any problems. A few weeks later, we were sent a payment coupon, and the payment included private mortgage insurance (PMI).
There was nothing in any paperwork at the closing, and we questioned our attorney about not having PMI. We thought there might be PMI on the loan, but our appraisal came in higher than expected, so we assumed that the PMI had been eliminated. Our attorney looked over the documents and confirmed that there was no PMI attached to the loan and there was no documentation included that had information on any PMI payments.
We have now questioned our lender and their response was that there was a minor error on their part. They told us to sign and return some paperwork agreeing to the PMI. Needless to say, I will not sign this post-closing. Our loan-to-value ratio is at about 86 percent. Any information you can provide will be greatly appreciated.
A: Your problem is most unusual. It seems that your lender was quite sloppy in its paperwork. While your paperwork at the closing did not disclose any PMI, you seem to have been aware that your loan would require it.
PMI is purchased by your lender to protect it from a loss in case the lender has to foreclose on your home and the sales price is insufficient to pay off the debt. PMI is generally required on all loans in which the loan amount exceeds eighty percent of the value of the home.
In your case the loan-to-value ratio is about 86 percent. Unfortunately, that means you would have been required to obtain PMI for your closing. Your loan closer might have been sloppy with the documentation but you should check your loan application documents and disclosures. You will probably find that the disclosures indicate that you were supposed to pay PMI.
Most loan packages contain a document that requires the borrower to execute additional documents to correct typographical errors and to execute additional documents that may have been missed. If you read your loan documents carefully, you’ll likely find this page and will see that you initialed it to indicate you read and understood what the page said.
Because of this document, you will need to execute these documents and pay the PMI that is required by your loan.
But you might not have had to execute those documents if you hadn’t had the conversation with your lender about PMI. In your letter you state that you expected to pay it and were surprised when it didn’t turn up in the paperwork.
If you hadn’t had these conversations with your lender it might have indicated that the lender failed to give you the proper disclosures prior to the refinancing your loan. Proper disclosure about the true costs of your loan is required by law so that you have the ability to compare loan products and lenders.
If the true cost of the loan or the fact that it would carry PMI was not disclosed to you, you lost your ability to fairly compare products and make a proper decision.
Because you weren’t notified about the problem until weeks after the closing, you also lost your ability to cancel the refinancing within the three day right of rescission given to homeowners upon refinancing their main home loan.
What you need to do now is to review your loan documents and decide whether you can say to the lender that you should not pay for something you knew you should have paid for and for which the lender gave you disclosures.
One last thought: There are lenders in the marketplace that will give a borrower a loan without PMI even if the loan to value exceeds 80 percent. These lenders either incorporate the PMI cost into the interest rate, or they do a loan called an “80/10/10,” which effectively gives you an 80 percent first loan (so, no PMI), a 10 percent home equity loan (which in your case your be a 6 percent home equity loan) and the final 10 percent is the down payment or equity (which in your case would be 14 percent).
An 80/10/10, also known as a piggy-back loan, would have allowed you to refinance without paying PMI — and you may have even lowered your monthly payments.