By Times staff writer
If you're a homeowner, does it bother you that you may be spending hundreds of dollars each year for unnecessary private mortgage insurance, or PMI? Well, it should. The good news is that if your home has appreciated in value or you've been making home improvements or extra payments, you might be able to shed PMI once and for all.
1. What PMI does. PMI makes mortgages possible for home buyers who can't afford to put 20 percent down. It covers lenders in case you default, and it's supposed to expire when you reach the 20 percent equity mark, which can take years, since your early payments are mostly interest. Even after that point, some homeowners have unwittingly made extra PMI payments for years.
2. A little bit of help. The federal Homeowners Protection Act, which went into effect in July 1999, and recent Freddie Mac and Fannie Mae guidelines for existing loans have made it easier for more people to ditch PMI. If you have a government-insured Federal Housing Administration loan that closed after Jan. 1, 2001, your insurance premium can be dropped once you pay off 22 percent of it.
3. Consider your home's current value. If home prices in your area have been on the rise or you've made home improvements that increased the value of your home, your equity may have crossed the 20 percent mark.
4. Prepay your loan. Another way to add equity surprisingly fast is to make extra payments and be certain that they apply to your mortgage principal. An additional $40 a month can reduce the life of your loan by five years.
5. What kind of loan do you have? Borrowers with 15- or 20-year loans attain 20 percent equity much faster than people with 30-year mortgages.
6. Grab your calculator. If you think you might be approaching the 20 percent equity threshold, do this math problem: estimated home value minus mortgage balance equals equity. Equity divided by estimated value equals percentage of equity. If the number is .20 (20 percent) or greater, you've made it.
7. Contact your lender. Call to inquire about PMI policies and share the news about your calculations. Many lenders will eliminate the PMI policy when asked, although most require a written request and an appraisal of the property.
8. Get an appraisal. You'll have to foot the bill of $200 to $350 for the independent appraisal, but it's well worth it if you immediately begin saving $1,000 or more a year by eliminating PMI.
9. Don't be late. Your lender will examine your payment history when deciding whether to cancel PMI. You may not qualify for cancellation if you've been 30 days late in the past 12 months or 60 days late in the past 24 months.
10. Are you a landlord? If your property is used for rental income, higher percentages of equity will be required before you can cancel your insurance.
-- Compiled by Laura T. Coffey. Sources: Bankrate.com (www.bankrate.com); Kiplinger's Personal Finance magazine (www.kiplinger.com); Federal Housing Administration (www.hud.gov)
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