Under the Homeowners Protection Act, what happens to PMI when the borrower's loan-to-value (LTV) ratio reaches 78%?

Under the Homeowners Protection Act, what happens to PMI when the borrower's loan-to-value (LTV) ratio reaches 78%?

• A. It must be reduced by half
• B. It will be automatically discontinued
• C. It needs to be explicitly requested by the borrower
• D. It can be extended for another year

Answer: (B)

Under the Homeowners Protection Act, when a borrower's loan-to-value (LTV) ratio reaches 78%, the Private Mortgage Insurance (PMI) must be automatically discontinued. This provision is designed to protect borrowers from paying unnecessary insurance premiums once they have built sufficient equity in their homes. The law recognizes that once the LTV ratio drops to 78%, the risk to the lender decreases significantly because the borrower has enough equity that potential losses from foreclosure are minimized. Therefore, it stipulates that PMI should be canceled automatically at this point, without requiring any action from the borrower, making it a consumer-friendly regulation. This automatic cancellation process stands in contrast to other requirements that may involve borrower intervention or additional payments, emphasizing the intent of the Homeowners Protection Act to ease the financial burden on homeowners as they gain equity in their properties.

Under the Homeowners Protection Act, when a borrower's loan-to-value (LTV) ratio reaches 78%, the Private Mortgage Insurance (PMI) must be automatically discontinued. This provision is designed to protect borrowers from paying unnecessary insurance premiums once they have built sufficient equity in their homes.

The law recognizes that once the LTV ratio drops to 78%, the risk to the lender decreases significantly because the borrower has enough equity that potential losses from foreclosure are minimized. Therefore, it stipulates that PMI should be canceled automatically at this point, without requiring any action from the borrower, making it a consumer-friendly regulation.

This automatic cancellation process stands in contrast to other requirements that may involve borrower intervention or additional payments, emphasizing the intent of the Homeowners Protection Act to ease the financial burden on homeowners as they gain equity in their properties.