Your home may be able to give you the gift of extra cash each month in 2019. In a recent article published by The Mortgage Reports, contributor Aly J. Yale states, “American homeowners have gained billions in equity over the past year, according to the latest Home Equity Report from CoreLogic. The average owner saw their home equity jump 9.4 percent since 2018 — an aggregate increase of $775.2 billion across the nation.” This increase in home equity may allow you to cancel the PMI, private mortgage insurance, 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: MIP and PMI. Government loans like FHA or USDA have MIP and the mortgage insurance premiums and/or upfront fees are a set 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, or private mortgage insurance. 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 if 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 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, you owe $195,000, purchase price of your home was $235,000 4 years ago, current appraised value is $250,000. In this scenario, getting a new appraisal to determine the updated value of your home increased the equity position from 17% based on purchase price to 20% based on current market value. Appraisals can cost between $300 and $500 so be sure to consult a mortgage banker 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. Other requirements may include:
- Requests to cancel PMI be made in writing
- Being current on your mortgage payments
- Having a good payment history
- A minimum time requirement before PMI removal can be requested, which is usually 2 years from the date you closed on your loan
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.
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.
Written 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 in 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. Ameris Bank is not affiliate with nor endorses any of the companies listed in this article.