Housing & Mortgage
How to Shed Costly Private Mortgage Insurance
Borrowed with a low-down payment? Rising home prices may allow you to discard your PMI
If you made a down payment of less than 20% when you bought your home, your deal included an additional charge for mortgage insurance that protects your lender in the event you stop making payments. For a $250,000 mortgage, that extra cost could be $125 or more a month. Not exactly peanuts.
The good news is that strong price gains over the past few years could mean you’re now eligible to have the extra monthly charge that is embedded in your mortgage payment removed.
That’s because once the value of your loan is 80% or less of the home’s appraised value, you are eligible to get rid of this extra cost if you have what’s known as a “conventional” mortgage.
A conventional mortgage is industry-speak for loans not insured by the Federal Housing Administration. (As of June 3, 2013, mortgage insurance attached to a low-down payment, FHA-insured mortgage is permanent; the only way to wiggle free, regardless of how much equity you have, is to refinance.) Conventional mortgages with down payments of less than 20% typically have private mortgage insurance (PMI) added to the mortgage deal.
Once you have the equivalent of 20% equity – meaning your loan is 80% or less of your home’s value – you can apply to have your PMI cancelled.There are two ways to reach 20% equity:
Each month you pay your mortgage, a portion goes toward reducing your loan balance (called the principal). That said, in the early years of a 30-year fixed rate mortgage, the majority of your monthly payment goes toward interest, not principal. With a 30-year fixed rate mortgage charging 4.5 interest, and no change in your home’s value, you won’t reach 20% equity till about year 10.
But chances are you don’t need to wait that long.
The other way to get to 20% is if your home’s value rises. For instance, let’s say you purchased a $262,500 home with a 30-year fixed rate mortgage at 4.5% and you made a 5% down payment, so your mortgage is for $250,000. After five years of payments your balance is $228,000; that brings your equity to around 13% of the original purchase price. Still not enough to get you out of paying private mortgage insurance.
But let’s say home prices in your area have increased a total of 15% over the past five years. The home you bought for $262,500 is now worth $302,000. That means your equity (the value of your home minus the mortgage balance ) is around 25%. No more PMI for you!
In fact, once your equity reaches 22% your lender is required by federal regulation to cancel the PMI at no cost to you, as long as you have been on-time with your payments for the past 12 months. But you may have to nudge to get it done right when you cross the 22% line.
You can also request – it must be in writing to your loan servicer—that your insurance be cancelled once you have 20% equity. At this slightly lower level you will be required to cough up $500 or so to have an appraisal done. That’s not nothing, but it’s probably no more than a few months of PMI payments.