Private mortgage insurance offers the lender some sense of protection when a person takes out a mortgage without making at least a 20 percent down payment. When you have mortgage insurance, you either pay monthly premiums or agree to a slightly higher interest rate each month. Mortgage insurance isn’t meant to last for the life of the loan, however. If you don’t want to pay an extra fee each month or pay a higher rate throughout the term of the loan, dropping mortgage insurance is possible.
Wait for it
According to the Georgia Department of Banking and Finance, if you purchased your home after July 29, 1999, your private mortgage insurance is canceled automatically once the loan-to-value ratio on your house is 78 percent or lower. That means you’ll have made enough payments on your mortgage to have put down 22 percent of the house’s value. You must be current on your mortgage payments for the automatic cancellation to take effect.
Ask the lender
Usually, dropping mortgage insurance automatically is based on a date determined by your lender when you took out the loan. For example, your lender might calculate that after paying your mortgage as agreed for 24 months, your loan-to-value ratio will be 78 percent. However, you might decide to make additional payments on your mortgage to increase your equity faster. In that case, you can ask the lender to cancel the mortgage insurance when the loan-to-value ratio actually falls to 80 percent, which is before the anticipated date.
Your home and mortgage need to meet a few requirements for the lender to cancel the insurance, according to the Consumer Financial Protection Bureau. You must be current on payments, and you must make the request in writing. Your lender might also require you to have your home appraised to guarantee that its value hasn’t declined and that your loan-to-value is actually 80 percent or less.
Depending on your circumstances, the quickest way to drop your mortgage insurance might be to refinance your loan. Refinancing not only gives you the chance to get rid of mortgage insurance, but it also means you can get a much better interest rate on your mortgage while rates are still low. To successfully drop the insurance when you refinance, you should have at least 20 percent equity in your home. You can get the equity if the value of your home has gone up since you bought it or if you’ve saved enough cash to put down on the new loan so that the loan-to-value ratio is 80 percent or less.
Private mortgage insurance can help you buy a home when you don’t have much to put down. Once you get sufficient equity in your home, there’s no reason to hang on to it.
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