Canceling private mortgage insurance

Chances are, if you put less than 20 percent down when you purchased your home, your mortgage lender required you to take out private mortgage insurance (PMI). This insurance protects the lender in the event that you should default on the loan, and you benefit by being able to take out a mortgage that you might not otherwise have qualified for.

But the cost of paying this extra mortgage premium each month adds up. It’s in your best interest to cancel it as soon as possible. So, how do you go about it?

What PMI costs

The cost of PMI varies, but it’s generally about one-half of 1 percent of the purchase price of a home. So, if your home cost $300,000, that would work out to around $1,500 a year. Typically, this amount would be divided by 12 and included in your monthly mortgage payment. In this case, it would add an extra $125 a month onto the cost of your payment.

When can you cancel?

According to the provisions of the Homeowner’s Protection Act (HPA) of 1998, lenders are obliged to cancel PMI (on mortgages signed on or after July 29, 1999) when you reach 22 percent equity in your home, provided your payments are current. You also have the right to request cancellation of PMI when you have paid down your mortgage to the point where you reach 20 percent equity in your home. In order to qualify, your lender will likely expect you to have a good payment history, meaning that you have not been 30 days late with your mortgage payment within the past year or 60 days late within the past two years.

Exceptions to the rule

HPA rules do not apply to government-insured VA or FHA loans. VA loans do not require PMI, and FHA loans are covered by FHA insurance that lasts for the life of the loan. Fannie Mae and Freddie Mac loans are also subject to different regulations. In the case of these loans, it is up to the homeowner to request cancellation of PMI, and termination is permitted after two years if the balance of the loan is no more than 75 percent of a home’s current appraised value, and after five years if it is no more than 80 percent. These agencies also require that you have a good payment history.

How to cancel PMI

Contact your lender or mortgage provider, or call Fannie Mae or Freddie Mac, to find out whether you qualify to cancel PMI and how to proceed. If you closed your mortgage before July 29, 1999, you can contact your state consumer protection agency to find out if your state has any laws that apply to early termination or cancellation of PMI. If you have built up enough equity, you may want to consider refinancing your mortgage to get rid of PMI. In some cases, refinancing may also enable you to get better terms on your loan.