Dear Dr. Don, We pay $330 per month in private mortgage insurance, or PMI, for our $550,000 mortgage. We have enough cash to pay down the mortgage by $60,000 -- enough to remove the PMI. We plan to move in two years or so. Is it worth paying down the loan? -- Jonathan Jump-start
Dear Jonathan, It appears to be a slam-dunk, but you want to work with your mortgage servicer to make sure the mortgage pay-down will result in the PMI payment being canceled. Mortgage servicers are required to provide contact information on where to call about the termination and cancellation of the policy.
In your case, getting the PMI canceled is equivalent to earning (pretax) about 6.6% on your $60,000 investment. The after-tax benefit is less if you can deduct your PMI payments, but still advantageous in a low-yielding interest rate environment.
The Homeowners Protection Act of 1998 requires that for home mortgages signed on or after July 29, 1999, your PMI must, with certain exceptions, be terminated automatically when you reach 22% equity in your home based on the original property value.
The PMI policy also may be canceled on your request, again with some exceptions, when you reach 20% equity in your home based on the original property value, if your mortgage payments are current.
The exceptions: PMI won't be canceled if your mortgage loan is considered high-risk, you haven't been current on your mortgage payments for the prior year or you have liens other than the mortgage on your property.