For loans made since July 1999, lenders are required (by federal law) to automatically cancel Private Mortgage Insurance (PMI) when the balance of the loan gets below 78 percent of the purchase price. (This law does not include some higher risk mortgages such as FHA loans.)
The calculations to determine when the monthly mortgage insurance are made from your principal payments toward your mortgage balance and does not fall off when the borrower achieves 22 percent equity by the housing market having appreciated rather it is from the lesser of the original purchase price or appraisal. If the previous loan was a refinance loan and there was monthly mortgage insurance then the appraised value at the time the loan was initiated will be used. The good news is that you can request cancellation of your PMI yourself (for your mortgage that closed after July ’99), no matter the original price of purchase, when your equity reaches twenty percent even if it is because of the homes market appreciation. Also, keep in mind that the Mortgage Insurance Company will have a minimum contract term of 2 or 3 years on Conventional Mortgages. So, you will have the mortgage insurance for 2 or 3 years even if you pay the balance down below 80% before the minimum contract term has been met if that was a piece of the original Mortgage Insurance Certificate.
Keep track of payments
Familiarize yourself with your monthly statements to keep your eye on principal payments and your current principal balance. You will also want to stay aware of the the purchase prices of the homes that are selling in your neighborhood that are similar to your own, or at the very least the price per a square foot if comparable homes are not available. If your mortgage is fewer than five years old, chances are you haven’t paid down much principal – it’s been mostly interest meaning your chances of removing mortgage insurance are small if the home has not appreciated in value.
Verify Equity Amount
At the point you think you’ve achieved at least 20 percent equity in your home, you can start the process of canceling your Private Mortgage Insurance. You have more than one option here. If mortgage rates are better you can often remove PMI by refinancing. If you are not looking for cash out in many cases without an appraisal. The other way is to communicate to your loan’s servicer via their customer service department that you are asking to cancel your PMI. The servicing institution will request proof that your equity is at 20 percent or above. You can acquire documentation of your equity by getting a state certified appraisal on form URAR-1004 (Uniform Residential Appraisal Report), required by most institutions before canceling PMI. Make sure the servicer does not require the use of one of their appraisers before obtaining the appraisal.
At Global Home Finance Inc., we answer questions about PMI every day. Call us: 972-724-3222.