If you have a mortgage, take note: You could be making an excessive payment.
How so? Depending on the loan you have, your lender may have required you to pay for private mortgage insurance (PMI) if you didn't put 20 percent down on your home. PMI protects the lender in case the homebuyer doesn't make the payments, say the Federal Trade Commission's website.
However, for some borrowers in certain situations, PMI isn't necessary. If you are one of these borrowers, read on to discover if you qualify to get rid of your PMI and pocket the extra monthly savings.
You've Reached 20 Percent Equity, but Payments Haven't Been Cancelled
One mistake that homeowners with a conventional loan often make is assuming that their PMI will automatically be cancelled once they reach 20 percent equity. However, that's not the case.
According to the U.S. Department of Housing and Urban Development, once a homeowner's equity reaches 22 percent, the mortgage servicer must automatically cancel PMI. However, homeowner's can actually request cancellation once their equity reaches 20 percent of the original value of the property - if they meet certain criteria outlined by their lender.
"Borrowers receive an annual disclosure that lets them know this is an option if they have no payments 30 or more days past due within 12 months, and no payment 60 or more days past due within the last 24 months," says Mike Kruczek, executive vice president and chief lending officer at DFCU Financial.
Getting Rid of PMI on FHA Loans
For homeowners with FHA loans, getting rid of PMI is a bit more complicated.
"If you acquired your loan after June 3rd, 2013, you will have to pay mortgage insurance for the life of the loan," says McDonald. "The only way to escape it is to refinance to a conventional loan."
McDonald says that sometimes this is not a good idea because interest rates have risen by roughly 1 percent over the past year. "Many people would be better off sticking with a lower rate and the mortgage insurance than refinancing," says McDonald.
And what if your FHA loan predates June 3rd, 2013?
"Your mortgage insurance goes away when you pay the balance down to 78 percent loan-to-value (LTV) or less, and you have paid the mortgage insurance for 60 months," explains McDonald. If your LTV ratio is greater than 78 percent and you haven't paid the mortgage insurance for 60 months, "your other option is to refinance to a conventional loan," says McDonald.
You've Made Significant Home Improvements
Have you done enough work on your home to increase the property value? If so, and as long as you meet the requirements in your annual disclosure (mentioned above), you may be able to drop your PMI.
"Mortgage insurance may be cancelled if the current value, based on a new appraisal, verifies that existing principal balance is 80 percent or less of the current value due to property improvements," says Kruczek. However, expect to pay for an appraisal to confirm the property's present value, which will likely cost around $400, says McDonald.
Kruczek says to submit your building supply and contractor receipts with your application to cancel PMI. "Borrowers should also submit a copy of the work orders and/or contracts made with paid receipts to justify the increase in value," he says.
If the appraisal demonstrates that you now have at least 80 percent equity, then the lender should eliminate the mortgage insurance.
Kruczek also says that it's important to note that borrowers cannot drop mortgage insurance due to normal appreciation of property value. "In other words, they cannot come back in two years because the market improved and ask to drop mortgage insurance because values increased organically," he says.