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The value of houses in my neighborhood has skyrocketed in the past few years, and I'm sure I have enough home equity to stop paying private mortgage insurance. Doesn't the government require lenders to drop PMI automatically when you have 22% home equity?
Yes and no. The rule requires lenders to drop your PMI, which protects them if you default on your loan, when your equity in your home reaches 22%. But that's only based on regularly scheduled monthly payments, not any increase in your home's value.
The difference can be big: Say you buy a $200,000 home and you take out a $170,000 loan. At the beginning, your home equity is $30,000, or 15% of the home's value. Based on your regularly scheduled payments, the PMI won't be dropped automatically until you've made enough mortgage payments to accumulate about $44,000 worth of equity.
But the lender may be able to drop your PMI when your home equity reaches just 20%, based on the payments you've made and the price appreciation.
Say your home rises in value from $200,000 to $250,000. Suddenly, you have $80,000 in home equity (your original $30,000 stake plus $50,000 in appreciation), or 32% of the home's value. If that's the case, the lender may drop your PMI if you get an appraisal proving the new value and have paid your mortgage on time for the last two years.
Before you pay the $250 to $300 for an appraisal, make sure that the value of area homes has risen as much as you think. Go to a Web calculator like the one at HomeGain (the service is free, but you'll need to register at the site) or a local real estate agent to get a ballpark idea of your home's current value.
It's worth the effort to get the PMI dropped as soon as possible. PMI tends to cost 0.5% to 1% of your loan balance each year, or $1,000 to $2,000 a year on a $200,000 mortgage.
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