Mortgage insurance is often a requirement for homebuyers who contribute less than 20% of the property's value as a down payment. While this insurance can be beneficial for lenders, many homeowners seek ways to eliminate it as soon as they reach 20% equity in their homes. Here’s a comprehensive guide on how to get rid of mortgage insurance when you reach 20% equity in the US.
1. Understand Your Mortgage Insurance Type
Before taking action, it's important to know the type of mortgage insurance you have. There are two main types: Private Mortgage Insurance (PMI) and FHA Mortgage Insurance Premium (MIP). If your loan is conventional, you’re likely dealing with PMI. For government-backed FHA loans, MIP can stick around for the life of the loan unless specific conditions are met.
2. Check Your Current Equity
To calculate your current equity, subtract the total amount owed on your mortgage from your home’s current market value. You can use online appraisal tools or consult a real estate agent for a professional opinion. If your equity is at 20% or more, it may be time to act.
3. Request a Home Appraisal
When you’re ready to remove PMI, the next step is to request a home appraisal. This appraisal will formally establish the current market value of your home. You’ll need to pay for this appraisal, and it's a worthwhile investment if it confirms that you have at least 20% equity.
4. Contact Your Lender
Once you have the results of your appraisal confirming your equity position, reach out to your lender. Discuss your desire to eliminate PMI and provide them with the appraisal report. Most lenders will require a formal written request, so ensure that all documents are submitted promptly.
5. Confirm the Requirements
Every lender has different policies regarding the removal of mortgage insurance. Some may require a minimum time frame since your last appraisal, while others may ask for additional documentation, such as proof of any home improvements that may have increased the value. Make sure you understand all requirements before proceeding.
6. Monitor Premium Payments
If your lender agrees to remove PMI, be prepared for any adjustments in your payments. You may see a decrease in your overall monthly mortgage payment when the insurance is removed. However, be cautious and continue monitoring your mortgage statements and ensure that the correct adjustments have been made.
7. Keep Records
After getting PMI removed, maintain all records of your notifications and communications with the lender. This will be useful in case any discrepancies arise in the future regarding payments or equity.
8. Refinance as an Alternative
If your lender does not allow you to drop PMI or if the process seems too complicated, consider refinancing your mortgage. By refinancing, you may secure a new loan at a lower interest rate and remove mortgage insurance in the process. This option can also help lower your monthly payment generally, depending on the terms.
Conclusion
Getting rid of mortgage insurance when reaching 20% equity in your home is not only possible but can save you a significant amount of money. By staying informed and proactive, you can navigate this process smoothly, enhancing your financial security and providing relief from additional monthly expenses.
