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How can I get rid of mortgage insurance?

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Thanks to the 1998 Homeowner Protection Act, it is now relatively simple for most homeowners to cancel their mortgage insurance policy. This law allows homeowners to cancel their mortgage insurance as soon as their principal mortgage balance is less than 80% of the original purchase price or the appraised value (whichever is smaller). In other words, you can cancel the insurance when you have paid for twenty percent of your home (i.e. have 20% equity). In addition, lenders must automatically cancel your mortgage insurance when the principal loan drops to 78% of the original.

So what do you need to do? If you about to buy a home using mortgage insurance, ask your lender for a written document explaining mortgage insurance and stating how and when you can cancel yours. If you are a new buyer, make sure you keep good records regarding your payments and the size of your loan. The lender only has to report the law to you once a year and will not tell you when you have reached the 80% line.

If you're already working to get to the 80% line, try to make extra payments, which will reduce your interest and get you to the line quickly. In addition, you can renovate your home to increase its value. If your home appreciates, you reach 80% of the price even sooner (though you will need to pay for an appraisal to prove the value).

If you've passed the 80% line and are ready to cancel, you'll need to make the request in writing. Contact your lender to find out where to send your intent to cancel. If you have any questions or problems, contact the state Consumer Protection Agency or do research with Freddie Mac/Fannie Mae.

This process will work as long as your loan meets a few specific criteria. First, you must have a conventional loan; most FHA or VA loans have mortgage insurance built into the life of the loan. In addition, your loan must have originated after July 29, 1999. If your loan originated prior to that date, you can still cancel mortgage insurance when you have fifty percent equity in the property, but contact your lender to see how you could speed up the process. You'll also need to wait until you have fifty percent equity if you are a high-risk borrower.

Finally, a few homeowners have lender-paid PMI, and others have placed liens on the property that interfere with their right to cancel mortgage insurance. If you have questions regarding the status of your insurance, contact your lender as soon as possible. Even though it benefits them if you have insurance, they still have to truthfully tell you your options.

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