real estate

Dropping PMI

When I bought my house, I had to buy private mortgage insurance. I had hoped to get the PMI dropped after the value of my house increased. But the housing market is starting to slow in my area. What's this going to do to my efforts to get my PMI drop

When I bought my house, I only put 10% down and had to buy private mortgage insurance. I had hoped to get the PMI dropped soon after the value of my house increased. But it now looks like the housing market is starting to slow down in my area. What's this going to do to my efforts to get my PMI dropped?

It all depends on what already happened to housing values in your area since you first bought your property.

Most lenders require you to buy private mortgage insurance if your loan is for more than 80% of the house's value and generally charge from 0.5% to 1% of the loan value in annual premiums -- adding up to $2,500 to $5,000 per year on a $500,000 mortgage, for example. These premiums aren't tax deductible and don't add to the equity of your home, but they can often be eliminated after your house increases in value.

Lenders generally are required to drop private mortgage insurance after your equity in your home reaches 22% of the property's value. But there's a big catch: In figuring your equity, the lender doesn't have to count any appreciation in value; only your down payment and the principal portion of your monthly payments. If you only put down 10%, it can take years before your equity reaches 22% of the property's value at the time you took out the mortgage.

But you don't have to wait for the lender to drop your PMI. The rules tend to be a lot more lenient if you ask the lender to drop the PMI instead of waiting for it to be dropped automatically. Many lenders will drop your PMI when your equity reaches at least 25% based both on your principal payments plus rising property values and any home improvements. Lenders generally want an appraisal, which tends to cost about $250.

Even if the housing market is starting to slow in your area, that still means that many homes are appreciating at about 4% to 6% for the year. But after several years of double-digit increases in many areas, you may have already built enough equity to get the PMI dropped.

To see what's been happening to the housing market in your area, see our Home and Condo Prices Where You Live calculator and our What's Your House Worth? article. And QuickenLoans has a helpful calculator that can estimate your equity in your home, based on information about your housing market, home improvements and current loan.

Lenders generally will not drop your PMI if you've missed any payments, and many require you to have the loan for at least two years. But you still may be able to get rid of PMI if you refinance, with the new loan based on your house's current value. You can search for the best mortgage rates at our Compare Mortgage Rates page. For more information about your mortgage options, see The Mortgage Squeeze.

Another way to avoid PMI: If you can't afford to make a 20% down payment, piggyback two loans so neither is for more than 80% of the house's value. Many people make a 10% down payment, then take out one loan for the other 10% and another one for 80%. The second loan -- the one for 10% -- will have a higher interest rate than your regular loan, but the interest is generally tax-deductible.

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