Private mortgage insurance might be one of the costs that you most hate to pay when you send in your mortgage payment each month. It's not necessarily because of the expense. It's because this insurance doesn't cover you. Instead, it protects your lender in case you default on your loan.
Fortunately, you don't have to pay private mortgage insurance, or PMI, forever. Once you build up at least 20 percent equity in your home, you can ask your lender to cancel this insurance. And your lender must automatically cancel PMI charges once your regular payments reduce the balance on your loan to 78 percent of your home’s original appraised value.
As home prices continue to rise, you might be closer to canceling PMI than you think. If your home’s value has increased since you bought it, which might be likely in some areas, you might have automatically built up more equity in it. That’s because your equity increases when the value of your home rises.
Is cancelling PMI early once your loan balance hits 80 percent of your home’s current appraised value worth the work?
That depends. You’ll need to prove to your lender that you’ve actually built up that 20 percent equity. And to do this, you’ll probably have to order a new appraisal of your home. If your PMI payment is high, though, taking this step might make sense.
How PMI works
You'll need to pay PMI when you take out a conventional mortgage, one not insured by the federal government, and you come up with a down payment less than 20 percent of the home's purchase price.
Your monthly cost for this insurance will be included in your mortgage payment, and you'll pay this premium until you build up at least 22 percent home equity.
If you take out a loan insured by the Federal Housing Administration, better known as an FHA loan, you'll have to pay a different type of mortgage insurance known as the Mortgage Insurance Premium or MIP. Since 2013, if you put down less than 10 percent for your FHA loan, you can’t cancel your annual MIP. If you put down 10 percent or more as your down payment, your MIP will last 11 years before your lender automatically cancels it.
If you take out a loan insured by the U.S. Department of Veterans Affairs, known as a VA loan, you won’t have to pay any monthly mortgage insurance premium at all.
PMI with conventional loans is different, of course, and cancellation is possible. The big question is if it's worth it to request a cancellation before your lender automatically does it for you.
What you pay each month for PMI will vary. MGIC, a provider of mortgage insurance, says that if you take out a 30-year, fixed-rate loan of $200,000 for a home in Arizona, and your FICO credit score is 740 or better, you can expect to pay about $51.67 a month for PMI if you come up with a down payment of 10 percent to 15 percent of your home’s purchase price.
If you take out a 30-year, fixed-rate loan of $150,000 for a home in Illinois and have a credit score of 680, MGIC says that your PMI would cost $31.25 a month if your down payment is less than 15 percent of your home’s purchase price.
The higher your monthly PMI payment, then, the more sense it makes to cancel it early.
Time for an appraisal?
You can't cancel PMI early if you haven't paid down your mortgage balance to at least 80 percent of your home's current appraised value. In other words, you need at least 20 percent equity in your home.
Say your home was originally appraised at $130,000 and you owe $120,000. This means you have paid your mortgage balance down to only 92 percent of your original appraised value, not high enough to request an early cancellation.
But if a new appraisal shows that your home is now worth $150,000, that same $120,000 that you owe means that you have paid your balance down to the required 80 percent of your home’s current appraised value.
Your lender might require you to pay for this new appraisal to prove that your home is worth more. Others might have their own in-house procedures for determining the worth of your home. Ordering and paying for an appraisal on your own will cost you about $400 to $500 depending on your location and size of your home. That price might be worth it depending on how much you’ll save each year in PMI payments.
Michael Hausam, real estate agent and mortgage broker with Vista Pacific Realty in Irvine, California, said that it pays for homeowners to keep abreast on home values in their communities. If nearby homes are selling for higher prices, this means that their homes might be increasing in value, too.
"A wise homeowner whose loan has mortgage insurance keeps a close eye on values, especially in today's appreciating market, to take advantage of the first opportunity to eliminate this payment," Hausam said.
How to cancel early
The first step to cancellation is to call your lender. Your lender will probably request that you send a written request for cancellation, and will give you an address to which you can send it. To cancel early, you must be current on your mortgage payments and you must have no recent missed payments.
Danielle Pennington, loan officer with the Wolcott, Connecticut office of BestWay Mortgage Corp., said that it is possible to cancel early, too, hit the 80 percent mark earlier simply by paying additional money toward your mortgage's principal balance each month.
This will get you to that 80 percent mark in fewer months.
"It's amazing how quickly even an extra $50 a month can lower the balance of your loan and, therefore, increase the equity you have," Pennington said.