How much equity?
● Homeowners may be able to get out of private mortgage insurance on loans between two and five years old when they reach 25 percent equity in their homes, or 20 percent for loans five years old and older.
To calculate your current equity:
1. Determine the approximate current value of your home (V). You may be able to estimate the value by comparing prices paid for homes in your neighborhood with similar square footage.*
As an example, assume the current home value is $230,000.
2) Find the current balance (B) on your mortgage loan (refer to your monthly mortgage statement). Example: $144,000
3) Subtract B from V: 230,000 - 144,000 = 86,000.
4) Divide the result by your home value: 86,000 / 230,000 = 37 percent.
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(*See Sunday's At Home section for home sales; divide sales price by price per square foot to find home with comparable square footage)
Private mortgage insurance tips
● If you're unsure whether you are paying private mortgage insurance, check your monthly mortgage statement for an itemized charge. Mortgage insurance typically ranges from $50 to $150 and is sometimes marked "PMI" or "MIP."
● Private mortgage insurance does not apply to Federal Housing Administration or Department of Veterans Affairs loans, which have government-backed insurance.
● Some lenders offer "lender- paid mortgage insurance," in which lenders absorb the mortgage insurance cost, offset by higher interest rates over the life of a loan.
● Prospective home buyers may consider so-called "piggyback" loans - second mortgages that increase your equity in a home at loan closing to 20 percent or more - to avoid the need for private mortgage insurance. You will incur additional interest costs, but the interest is tax-deductible.
● Lenders must notify borrowers when they have reached 20 percent equity by paying down their loans and are eligible for private mortgage insurance cancellation. Lenders must automatically cancel the insurance when your equity reaches 22 percent.
● You may be able to refinance your mortgage to avoid private mortgage insurance, but closing costs or higher interest rates will eat into any insurance savings.
Step-by-step
● Here's how to get your private mortgage insurance canceled:
1. Ask your lender or loan servicer for the procedure to request cancellation of private mortgage insurance. Most lenders have form letters or "kits" explaining their requirements.
2. Determine whether your equity in the home has reached the level needed to cancel insurance (usually at least 20 percent on the basis of paying down your loan, or 20 to 25 percent based on an increase in your home's value, depending on the age of the loan (see "How much equity?" box).
3. Determine whether your loan meets other requirements. For example, you generally must have paid on your loan for 24 months with no delinquencies to be eligible to drop private mortgage insurance based on higher appraised value.
4. Follow your lender's instructions for getting an appraisal. Some lenders will arrange an appraisal for you; others will accept an appraisal you set up with a certified appraiser. In either case, you will have to pay for the appraisal regardless of the outcome - probably $300 to $350.
5. You may have to request cancellation in writing.