How to Get Rid of Mortgage Insurance
If you purchased a home and put less than 20% down payment, chances are you either got a loan guaranteed by the government (FHA or VA), or you were required to purchase Private Mortgage Insurance (PMI). Unlike most other insurance you purchase, such as life, auto and health insurance, private mortgage insurance doesn’t protect you. You pay the premium every month along with your mortgage payment, but mortgage insurance only protects your lender if you fail to pay the mortgage.
Look at your monthly statement to see if you are paying mortgage insurance. It should be listed separately from the amount paid toward principal and interest, although it may be lumped under a column called “escrow.” If you’re not sure, call the phone number listed on your statement and ask your lender.
Even though the lender required you to pay mortgage insurance at the beginning of the loan, that doesn’t mean you’re stuck paying it forever. The trick now is…how to cancel that mortgage insurance? Here are five things you can do to get rid of mortgage insurance:
Make your Payments on Time
Be sure to make your payments on time, every time. If you’re asking the lender to eliminate mortgage insurance, you’re asking that they give up their security blanket. They won’t do that if you have a questionable payment history. Don’t have a questionable payment history!
Choose your Neighborhood Wisely
Live in an appreciating neighborhood. If the value of your home goes up, and now the remaining mortgage balance is less than 80% of that shiny new number, call your lender. Let’s say you bought your home for $250,000 three years ago and put 5% down payment. Your original mortgage balance started at $235,000. If homes are now selling in your neighborhood for $295,000, thank your new neighbors. They increased your property value, and made it possible for you to request that your mortgage insurance be canceled.
Add Value to your Home
Let’s say you finish the attic or basement, and add a bedroom and bathroom. If those home improvements increase the value of your home enough, you may be able to flush the mortgage insurance. You’ll have to prove that the home is actually worth more with an appraisal. That can set you back $350 or so. But it is worth paying for an appraisal because it will save you money every month thereafter.
Refinance your Mortgage
This can be an expensive way to get rid of mortgage insurance because there are always closing costs associated with a new loan. However, refinancing can make sense if interest rates have dropped below what you are paying on your current mortgage. When you talk to your lender, ask about Lender Paid Mortgage Insurance (LPMI). Lenders will pay for mortgage insurance by charging a small percentage point more than the going interest rate. If rates have gone down, you may still be better off by refinancing with LPMI. And it comes with a fringe benefit, because LPMI is a part of the interest rate you are paying, it’s tax deductible.
Wait It Out!
If you took out the loan after 1999, according to the Federal Trade Commission, as long as it’s not considered high risk, your lender is required to automatically drop the mortgage insurance when the equity reaches 22% of the original appraised value. That means when you’ve made enough principal payments to lower the balance. This works if you had a traditional loan paying back principal and interest. The down side is that it can take a long time. On a thirty year mortgage it won’t happen until somewhere around year 15, depending on the interest rate. (If you have an interest only loan, you’re out of luck on this one because the amount owing on the mortgage doesn’t go down with each payment.)
However, to get ahead of the game you can, by law, request your lender to cancel mortgage insurance when the equity reaches just 20%, and they must comply. By keeping track of when your balance has reached 80% of your home’s original value at the time you took out the loan, you can save yourself several months, or even years, of paying mortgage insurance that you don’t have to pay.
File a Complaint with with Federal Trade Commission (FTC)
Lastly, if your lender won’t agree to cancel your private mortgage insurance, and you feel that based on the value of your home, they should, you can file a complaint with the Federal Trade Commission.
