PMI Private Mortgage Insurance - Keep Track To Save Money
Forgetfulness can be quite costly, especially when it comes to your mortgage. It's estimated that 40% of people who take out a mortgage have to pay Private Mortgage Insurance (PMI). If you have no idea what that is, then it's likely you'll give money to your mortgage lender that should be going into your savings.
When you purchase a home and you make a down payment of less than 20%, most mortgage lenders will require you to pay for PMI. The PMI allows you to qualify for a mortgage with a lower down payment because the PMI protects the mortgage lender against any default on the loan.
Once you reach 20% equity in your house, you no longer need to pay the PMI. The problem is that the PMI is not automatically cancelled when you reach this point. The Home Owners Protection Act of 1998 requires that mortgage lenders terminate PMI, but the law says that they must do this at 22%. That means if you don't watch your mortgage carefully, you'll continue to pay for PMI even after you no longer need to pay it. Since the 20% equity mark is typically reached a number of years after your mortgage payments begin, most people forget that they are paying it.
This PMI fee is typically hundreds of dollars a year and can easily be over $1000 a year. While PMI rates vary, a typical payment would be 1/2 of 1% of the loan amount. For example, if you purchased a $400,000 home with a 10% down payment, the lender would charge you $1800 a year for the PMI ($400,000 - $40,000 down payment = $360,000 x 0.005).
To ensure that you don't pay for PMI longer than requires, get your mortgage payment statement or call your mortgage company to see when you will reach the 20% equity point. Make sure to clearly mark your calendar so that you can remove the PMI from your mortgage payment. Once you reach 20%, simply contact your mortgage lender to have them remove it.
PMI can also be removed if the value of your house has significantly increased. If houses in your area have significantly increased in value since you purchased your home, you may want to consider getting an appraisal. The increased value of your house may put you over the 20% equity mark allowing you to cancel the PMI. Be sure to contact your mortgage lender to find out exactly what documentation you need to provide to have your PMI cancelled under this scenario. If you choose this method, be sure that the appraisal will put you over the 20% equity mark. Appraisal costs will fall on you and can cost hundreds of dollars meaning if you appraise at less than the 20%, you have wasted the cost of the appraisal.
Last edited by jeffrey : 03-06-2007 at 11:40 PM.
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