The cost of private mortgage insurance varies depending on the down payment and mortgage loan, but is generally about half a percent of the total loan amount. So how exactly is it calculated? Let’s say you bought a house for $100,000 and put $10,000 down. Your lender will multiply the remaining 90 percent by 0.005 percent. The result, $450, is your insurance premium, which is divided into monthly payments.
After a few years of paying off your mortgage balance, you should be able to stop paying the premium. Keep track of your payments and contact your lender when you reach 80% equity, so the policy can be canceled. In 1999, a new law, the Landlord Protection Act, was passed. This law requires lenders to inform you, the buyer, of the number of months and years it will take to repay twenty percent of your principal. However, it’s always a good idea to keep track of them yourself.
This same law also allows lenders to require certain buyers to continue their PMI payments, up to 50% of equity. This requirement applies to buyers classified as high-risk borrowers. Some Federal Housing Administration loans may even require home buyers to carry private mortgage insurance for the life of the loan.
If the idea of paying for this type of insurance for years doesn’t sound appealing to you, you’re not alone. Over the years, new ways to avoid these payments, even if you don’t have the 20 percent down payment, have emerged. A commonly used strategy is to pay a higher interest rate on your mortgage. Some lenders will waive the requirement for private mortgage insurance if the buyer agrees to pay a higher interest rate. One of the advantages of this strategy is that the mortgage interest becomes tax deductible, while the insurance premium is not.
Another way to avoid paying PMI is to use the “80-10-10” loan strategy. This strategy involves taking out two loans and making a 10% down payment to purchase a home. One loan finances 80 percent of the mortgage, while the second loan finances the remaining 10 percent of the sales price. The second mortgage – the one that covers the 10 percent – has a higher interest rate. But since the loan amount is small, the interest charges are relatively easy to repay. Under this plan, mortgage interest is also tax deductible.
Fortunately, you may also be able to cancel your private mortgage insurance if you can prove that the value of your home has increased significantly. If your home’s value has increased, you may already have 20 percent (or more) of the equity you need to cancel the policy. You can submit proof to your lender, but the process is slow. Expect to wait up to two years for the lender to make a decision.
If you have a poor payment history or your credit report reflects liens placed on your property, your lender may continue to enforce your PMI insurance policy. You should speak to your lender to see how any changes to your credit report may affect the policy.