Eliminating Private Mortgage Insurance

For loans made after July 1999, lenders are required by federal law to automatically cancel Private Mortgage Insurance (PMI) when the loan balance falls below 78 percent of your purchase price — not when you achieve 22 percent equity, which will happen much more quickly with rising property values. (Certain "higher risk" loans are excluded.) But you have the right to cancel PMI (for loans made after July 1999) once your equity reaches 20 percent, regardless of the original purchase price.

Keep track of your principal payments.  Also keep track of what other homes are selling for in your neighborhood.  If your loan is under five years old, chances are you haven't paid down much principal — it's been mostly interest.  But property values in many parts of the country have gone through times of strong appreciation, and that can earn you 20 percent equity even if you haven't paid down much principal.

When you think you've reached 20 percent equity in your home, you can begin the process of freeing yourself from PMI payments!  You will need to notify your mortgage lender that you want to cancel PMI payments and you'll need to submit proof that you have at least 20 percent equity.  A state certified appraisal on the appropriate form (URAR- 1004 uniform residential appraisal report for single family homes) is the best proof there is — and many lenders require one from there own appraiser before they'll cancel PMI, although some will still allow you to choose your own.

Another opportunity to eliminate PMI is to finance any amount over 80% of the value/sales price of the home in a second mortgage.  This can be done when purchasing or refinacing your home.  PMI was not tax deductable on a primary residence for most of my career, but is now tax deductible for many homeowners.  Please check with your tax professional to find out how PMI affects your particular tax situation.

Please discuss PMI and the alternatives to PMI with your Stone Oak Mortgage lending professional to help determine which option may be best for you.