Extra Cash Could Be Hiding in Your Mortgage Statement
Your mortgage statement could reveal a way to save extra cash each month. If your mortgage payments currently include private mortgage insurance (PMI), reviewing your current equity position may be a way to save you money.
Many homeowners have seen their equity rise due to increases in housing values over recent years and from diligently making their monthly mortgage payments. This increase in home equity may allow you to cancel the PMI portion of your monthly mortgage payment, thus lowering your monthly mortgage payment overall.
It’s important to clarify there are two types of mortgage insurance: mortgage insurance premium (MIP) and private mortgage insurance (PMI). Government loans such as FHA or USDA have MIP and the mortgage insurance premiums and/or upfront fees that are set to a certain amount that cannot be removed from the loan. The only way to eliminate MIP is to refinance into a conventional loan that does not require mortgage insurance. Conventional loans made with less than a 20% down payment have PMI, and this amount can be removed from the loan at the request of the homeowner once the loan balance reaches 80% or less of the purchase price/value or the home has accrued 20% equity based on today’s market value.
Calculating Your Equity
Begin by dividing the outstanding balance you owe on your home by the purchase price of your home or the original appraised value of your home. For example, if you owe $199,000 and your home was purchased at $250,000 then your loan balance is 80% and your equity is 20%.
Another way to calculate the equity percentage in your home is by obtaining a new appraisal and using the current market value instead of your purchase price to determine if you have at least 20% equity in your home. For example, if you owe $199,000 and the purchase price of your home was $235,000 four years ago, your current appraised value is $250,000. In this scenario, receiving a new appraisal to determine the updated value of your home increased the equity position from 16% based on purchase price to 20% based on current market value. When requesting a cancellation based on current market value, additional equity and seasoning requirements may apply. Appraisals can cost between $300 and $500, so be sure to consult a mortgage banker to review the equity and seasoning requirements of your specific loan before undertaking this expense.
How to Request PMI Cancellation
You should receive an annual notice informing you if you have PMI on your loan and your rights to request cancellation if you meet the equity and other requirements. Examples of other requirements may include:
Requests to cancel PMI be made in writing.
Being current on your mortgage payments.
Having a good payment history.
Minimum seasoning requirements.
An appraisal to determine that the home has not decreased from the original value.
What happens if I forget to request PMI cancellation?
You are covered! The federal Homeowners Protection Act requires lenders to remove PMI automatically once your outstanding loan balance reaches 78% of your home’s purchase price and if you are current on your mortgage payments.
Not quite at 20% equity yet?
Consider paying an extra $50 a month towards principle on your mortgage payment. Extra payments towards principle each month can go a long way towards lowering the balance owed, reducing total interest paid and reducing the overall term of your loan.
By: Marlene Sheard
Marlene is a mortgage marketing representative for Ameris Bank and previous sales and marketing president for her local Home Builders Association. She enjoys sharing her experiences for the buying, selling, and financing of homes.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.