Ask Kim
Saying Goodbye to PMI
Aren't lenders required to drop PMI when you have 22% equity in your home?
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
November 13, 2002
The value of my house has increased significantly in the past two years, yet my lender continues to bill me for private mortgage insurance. I thought they were required to drop PMI when you have 22% equity in your home?
You're on the right track, but you'll need to take a few steps to get the private mortgage insurance dropped. The results are well worth the effort, though. You could easily save yourself a thousand dollars or so every year ($1,000 to $2,000 on a $200,000 mortgage). Housing values have appreciated so much in the past few years, that everyone who's paying PMI should figure out whether they can drop it.
Lenders usually require PMI if you make less than a 20% down payment. Even though lenders are required to drop PMI when you have 22% equity in your home, that figure is based only on your regular payments; not any increase in the value of your home. For example, if you buy a $225,000 house, put down $25,000 and take out a $200,000 loan, you start out with 11% equity in the house. The lender won't be required to drop your PMI until you accumulate about $50,000 worth of equity from making regular payments (22% of the house's original value).
But the lender may drop PMI if you provide an appraisal showing that the value of your home has increased. They usually want to see equity of at least 25% of the house's current value if it's between two and five years after you take out the mortgage; 20% after five years. And they can turn down your request if you've made late payments.
So say, for example, that your house is now worth $325,000. In that case, you have more than 38% equity just from the appreciation and your down payment -- more if you add in the principal payments you've made since you bought the house.
Before getting an appraisal, which generally costs about $250 to $300, make sure houses in your neighborhood have appreciated as much as you think. Ask your realtor or visit Domania.com's home price check tool to find out how much nearby houses have sold for recently.