by Hank Coleman
Do you hate paying private mortgage insurance every month? You might be paying it even when you don’t have to. If you bought your house with a down payment of less than 20% of your home’s value, you are most likely very familiar with private mortgage insurance, PMI. Private mortgage insurance is extra insurance that your mortgage lender requires you to make in case you default. PMI protects your mortgage lender in the event you default on your mortgage payments. Most homeowners who have less than 20% equity in their homes have to pay PMI. Every homeowner hates paying for PMI. Typically, it is an extra $100 or so that is just paid to an insurance company that neither lowers your loan balance or even pays for any interest towards the principle of your mortgage. But, it does not have to be that way. You can eliminate PMI.
Request The Cancellation Of PMI
According to the Federal Reserve, many homeowners do not realize that they can request that their lender cancel their requirement for private mortgage insurance once they reach 20% in home equity. Forgetting to requrest the cancellation of PMI can end up costing you thousands of dollars if the homeowner does not catch it early. Private mortgage insurance typically can cost up to $1,500 per year for a $200,000 mortgage depending on the amount of the down payment. As soon as you have reached the threshold of 20% in equity in your home though, you should contact your mortgage company and request the cancellation of your PMI. You need to be current with your mortgage in order for your lender to consider cancelling your PMI requirement, of course, and many lenders also look for a good payment history as well when considering the request. The law provides lenders a little latitude in this respect giving them the option to deny your request if you are not a current and on time mortgage payer.
How Do You Cancel PMI?
The Homeowner’s Protection Act (HPA) of 1998 gave homeowners the right by law to request the cancellation of private mortgage insurance once you have more than 20% equity built up in your home at its current value. This can play havoc in today’s market where home values have recently declined sharply across the country. Your lender will most likely require you
to provide an independent appraisal of your home’s value which is a cost that you would be responsible for paying. But, that could be well worth the time and energy of spending $400 for the appraisal if it helped you cancel your PMI and subsequently saved you over $1,000 per year. Now, that money could be turned around and used to pay your mortgage off even earlier or added to a high interest savings account to increase your emergency fund. According to David Bach’s bestselling book, The Automatic Millionaire, paying one extra mortgage payment per year on a thirty year fixed rate mortgage can shave off seven years or more on the life of your loan and hundreds of thousands in interest.
Some Cancellations Of PMI May Be Automatic
Thanks to the Homeowner’s Protection Act, private mortgage insurance can be cancelled automatically in some cases depending on which type of home mortgage you have. For a conventional loan, mortgage lenders are typically required to automatically cancel PMI once your loan balance reaches 78% of your home’s value if you are in good standing. The problem, in this case, is that your home may have declined significantly in value, and you may not agree with your bank or mortgage lender’s new assessment of your home’s value. In that case, you will have to make your case to your lender and prove your home’s value and your equity position. Once again, your mortgage lender most likely will require you to have an appraisal conducted at yoru expense of your home to assess its current value.
If you do not request the cancellation of your private mortgage insurance payment when you reach 20% in equity in your home, you could be losing over $100 per month and thousands of dollars each year you continue to make needless payments. While your lender may be required to automatically cancel, they may delay doing so because of their perceptions that your home has lost its value in the recent recession. It is up to you to stay on top of your lender, prove your home’s value, and request the cancellation of your private mortgage insurance.
Have you ever continued making payments on your PMI after paying off 20% of your home? Have you ever had issues with a lender challenging your home’s value when you requested the cancellation of PMI?