If you put less than a 20% down payment on your home
loan, you were probably required to purchase private
mortgage insurance to cover your lender against your potential
default on the mortgage.
Once you have gained 20% equity in the home, you will
want to cancel the mortgage insurance. If you have an FHA-insured
mortgage, you will not be able cancel it. You are required to pay
mortgage insurance for the life of the loan.
Your lender is required by law to tell you at closing
how many months and years you will need to pay for mortgage
insurance. Most home buyers request the insurance be canceled once
their loan balance hits 80% of the home's appraised value. When the
balance reaches 78%, the lender is required to automatically cancel
the mortgage insurance. You should receive an annual statement that
lists who to call about canceling your mortgage insurance.
Lenders are allowed to require mortgage insurance from
high-risk borrowers until the principal balance is less than 50% of
the home's value. If you have missed payments, you may fall into the
high-risk category. Make sure that all of your payments are up to
date before you request the mortgage insurance be dropped.
To find out how much equity you have in your home, you
simply subtract the mortgage balance from the appraised valued of
the property. To find the percentage of equity you have, you divide
the equity by the value.
For example, if your home appraises for $200,000 and
you owe $150,000, your equity is $50,000. You have 25% equity in the
home.
If you are unable to persuade your lender to drop your
mortgage insurance, you should consider refinancing. If your home
value has increased, the new lender probably won't require mortgage
insurance. Sit down and compare the refinancing costs to the savings
you would get by eliminating the mortgage insurance.
You can get out of your mortgage insurance sooner than
planned by:
" Prepaying your mortgage - even $50 each month will
dramatically increase your equity over time.
" Have the home appraised - if the area you live
in is experiencing home value increases, you may want to have your
home re-appraised. This will cost you between $300 and $500 dollars.
Remodel or improve your home - by adding features to
your home, you can increase the market value of your home and the
equity you have in it.
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