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Mortgage Basics
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Removing private mortgage insurance

If you secured a home loan with less than a 20 percent down payment, chances are your lender required you to buy mortgage insurance to cover its exposure in case you default.

Once your equity position in the home reaches 20 percent, however, you will want to stop paying mortgage insurance (unless you have an FHA-insured loan, which requires premium payments to the government for the life of the loan).

Know your rights
By law, your lender must tell you at closing how many years and months it will take you to pay down your loan sufficiently to cancel mortgage insurance.

Most homebuyers ask that mortgage insurance be canceled once they pay their loan balance down to 80 percent of the home's original appraised value. When the balances drop to 78 percent, their mortgage servicer is required to cancel mortgage insurance for them. Mortgage servicers also must give borrowers an annual statement that shows who to call for information about canceling mortgage insurance.

The law does allow lenders to require mortgage insurance of a high-risk borrower until the balance shrinks to 50 percent of the home's value. You may fall into this high-risk category if you have missed mortgage payments, so make sure your payments are up to date before asking your lender to drop mortgage insurance. Lenders may require a higher equity percentage if the property has been converted to rental use.

Calculate the equity in your home
  • Equity = Value - Mortgage Balance
  • Percent of Equity = Equity / Value

Example: If you estimate (or, better yet, if you have it appraised) that the home is worth $200,000 and you owe $150,000 on the mortgage, your equity is $50,000 (the $200,000 value minus the $150,000 mortgage balance). You have 25 percent equity in the home (the $50,000 equity divided by $200,000 equals 0.25, or 25 percent).

With equity of 20 percent or greater, you have a good case to rid yourself of mortgage insurance. If you can't persuade your lender to drop mortgage insurance, consider refinancing. If your home value has increased enough, the new lender won't require mortgage insurance. Make sure, however, that your refinance costs don't exceed the money you save by eliminating mortgage insurance.

No more mortgage insurance

Here are steps you can take to get out from under mortgage insurance even sooner or strengthen your negotiating position:
  • Get a new appraisal: Some lenders will consider a new appraisal instead of the original sales price or appraised value when deciding if you meet the 20 percent equity threshold. The cost of an appraisal generally runs from $300 to $500.
  • Prepay on your loan: Even $50 a month can mean a dramatic drop in your loan balance over time.
  • Remodel: Add a room or a pool to increase your home's market value. Then ask the lender to recalculate your loan-to-value ratio using the new value figure.

 

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