Have you been paying private mortgage insurance for years? You may be closer than you think to getting rid of that extra payment, which for many people can amount to hundreds of dollars a year.
Home improvements, appreciation and extra payments can all shorten the time you have to pay PMI. If you think you might be unnecessarily paying private mortgage insurance, here's how to find out -- and how to get the ball rolling to stop paying PMI if your home equity is above 20 percent. Here are the questions to ask and the steps to take.
Lower your payments
Keep more of your money and stop paying PMI if your home equity is above 20 percent with these 9 steps.
1. Are you qualified?
The new law, plus new Freddie Mac and Fannie Mae guidelines for existing loans, will increase the number of people who can drop PMI. In general, the new rules make it easier to cancel PMI once equity reaches 20 percent. Unfortunately, some types of loans -- government-insured FHA and VA loans, for example -- require mortgage insurance for the life of the loan.
2. Do you have enough equity?
Start out your equity calculation by checking how much equity has built up under your original mortgage. Use a calculator from the Mortgage Insurance Companies of America to see how soon you'd pay down your mortgage to 78 percent of the purchase price -- the point at which lenders are required to cancel PMI. The calculator ignores appreciation, home improvements or extra payments of principal. To make the calculator work, you'll need to know your home's purchase price, the amount you put down, the loan amount and the interest rate.
3. Has your home risen in value?
Your equity grows faster in times of rising home prices or when you make improvements that increase your home's value. Every dollar of appreciation shortens the time you have to pay PMI. Have the homes in your neighborhood been appreciating? How much extra will that new kitchen add to the price? Talk to neighbors, local real estate agents and watch the home sale prices reported in the local newspaper. Use this information to get an idea of what your home is worth.
4. Have you made extra payments?
The other way to add equity is to make extra payments. Have you made any additional payments and applied them to the mortgage principal? If you're almost at 20 percent, a single extra payment may be enough to put you over the top.
5. Do the math
Estimated value minus mortgage balance = equity.
Equity divided by estimated value = percentage of equity.
If you come up with a figure of 0.20 (20 percent) or greater, and your estimate is accurate , there's a good chance you can drop PMI and save.
6. Call your lender
Talk to someone at your lender's customer service department to inquire about procedures for PMI removal. The formal request will likely have to be in writing, but calling first might save you some false steps later.
7. Write your lender
When you make your written request, ask your lender to provide, in writing, the minimum amount the property will have to be valued at to qualify to have the PMI dropped.
8. Get an appraisal
Most lenders require a formal appraisal of property -- at your expense -- before they will approve a request to drop PMI. Ask your lender if it has any specific requirements for the appraisal or appraiser that must be met. The company, rather than you, might have to order the work, for example, even though you'll have to pay the tab of approximately $200 to $350.
9. Final precautions
A couple of final words: Make sure your loan is up-to-date before making the formal written inquiry to your lender. The lender will consider your payment history when deciding whether to drop PMI. Also, if the property has been converted into rental use, higher percentages of equity are required before lenders will waive the insurance.