Cancel Your Private Mortgage Insurance

Private mortgage insurance provides protection to a lender in case you default on your home loan. Unless you make a 20% downpayment on a house, you’ll most likely be required to purchase PMI. PMI premiums on a median priced home ($170,600 in 2010) can run between $50 and $100 per month, according to the Mortgage Insurance Companies of America.

PMI might be unavoidable, but it isn’t eternal. Knowing exactly when you’re entitled to cancel coverage can save you a bundle. If you own a median priced home, you’ll pocket between $600 and $1,200 for each year’s worth of premiums you can avoid. That extra cash can be used to pay down your principal instead.

When PMI Is Cancelled Automatically

Though often maligned, PMI plays an important role. Many aspiring homeowners, especially first-time buyers, simply can’t afford to put down 20% on a house. Without the safeguard offered by PMI, lenders would be reluctant to extend mortgages to low-equity purchasers. For many borrowers, the coverage is short-lived. The Mortgage Insurance Companies of America, the industry trade group, estimates that 90% of homeowners are done paying PMI premiums, which are tax-deductible for some, within five years. If you purchased a house since 1999 and are still paying PMI, you probably fall under the Homeowners Protection Act (HPA) of 1998. Your lender is required to automatically cancel your insurance once you’ve paid down your mortgage to a 78% (0.78) loan-to-value ratio, or LTV. Put another way, once you have 22% equity built up. Many lenders will treat pre-HPA loans in a similar fashion. Call to confirm. To calculate your LTV, divide the outstanding loan amount by the original price of your home. If you have a $190,000 mortgage on a house you purchased for $200,000, the LTV is 95%. You’d need to get the mortgage balance down to $156,000–78% of the original value–to qualify for automatic cancellation of PMI. Click here to read the full article on my HAR Blog.

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When PMI Is Cancelled Automatically

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