How to Avoid Private Mortgage Insurance
If you put down less than 20% of the purchase price on a real estate purchase, you will be required to pay for private mortgage insurance. A method to avoid mortgage insurance is to get a piggyback loan: get a first mortgage for 80% and a second mortgage (home equity) loan for 10% or 15%. The interest on your second mortgage might be tax deductible, unlike the cost of mortgage insurance.
What Does Private Mortgage Insurance Cost?
Typically, such insurance costs about $250 to $600 a year on a $100,000 mortgage (about a .3 to .7 increase in your mortgage interest rate), although the average American pays just under $15,000 per year in mortgage insurance. This adds significantly to your monthly mortgage payment.
The major problem with mortgage insurance is that sometimes the lender never stops charging for it (see "Cancellation of PMI" below), even when the owner's equity in the home (or LTV ratio) drops below 80 percent and it is no longer mandatory. If you feel you are no longer required to pay such insurance, contact the lender and ask it to be terminated. Alternatively, if your home is appreciated in value, thus increasing your equity, you can also have mortgage insurance discontinued; however, you will be required to prove your home has increased in value -- meaning, you must pay for an appraisal.
NOTE: The above article is not discussing mortgage life insurance. Mortgage insurance covers the lender, not the homeowner and his heirs in the event the homeowner dies.
Mortgages
Mortgage Insurance and How to Avoid It
Cancellation of Private Mortgage Insurance
The Homeowners Protection Act of 1999 requires automatic termination of private mortgage insurance (PMI) on mortgages obtained after July 29, 1999 (both original mortgages and refinancing). This law doesn't apply to FHA loans or VA loans or lender-paid PMI loans.
Your PMI is automatically terminated when you reach 22 percent equity in your home based on the oriignal propery value provided that your payments are current.
There are certain exceptions to this rule. If your loan is considered "high-risk" or you are behind in your payment or have a record of not paying on time or if you have any liens on your property, your PMI does not automatically have to be cancelled.
How much can you save by having your PMI cancelled? On a typical $100,000 mortgage loan, your PMI might cost you about $40 per month or $480 per year.
How to cancel your PMI? Call your mortgage broker. In fact, your mortgage servicer is required to provide you with written notice about the above mentioned law on an annual basis.
