How You May Be Overpaying Hundreds of Dollars on Your Mortgage

If you put less than 20% down when you bought your house and used a conventional mortgage, you probably pay private mortgage insurance, or PMI, on the loan. While you have the ability to cancel it after you have 20% equity in your home, cancellation doesn't happen automatically until later, which could potentially result in you overpaying your mortgage by hundreds of dollars per month.

When you can get rid of PMI

The short version is that you can ask that your mortgage insurance (PMI) be cancelled if your loan is paid down to 80% of the home's original value.

Under the Homeowners Protection Act of 1998, you can request cancellation on the day your loan is first scheduled to reach 80% of your original property value, or when the loan actually reaches 80% of the property's original value. In other words, if you pay down your loan faster than your payment schedule requires, you could request to get rid of PMI sooner.

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For your lender to cancel your PMI in either situation, three things need to be true:

  1. You submit a written request for cancellation.
  2. You have maintained a good payment history.
  3. You supply evidence that your home's value has not declined since you bought it, if your lender requests it.

It's important to mention that your home's original value is generally defined as the lesser of the price you paid for the home or the appraised value at the time your loan closed. When applying for mortgage insurance cancellation, this is the value that is used to determine your loan-to-value ratio, unless your home's value has gone down since you bought it. Your lender may request (at your expense) evidence, such as a new appraisal, that your home's value has not declined before agreeing to remove your PMI.

Finally, it's also important to note that all the rules discussed in this article regarding the cancellation of PMI (FHA mortgage insurance has different rules) only apply to loans closed on or after July 29, 1999.

When your lender will get rid of it automatically

The same legislation that allows you to request cancellation of your PMI also says that if you are current on your loan payments, your PMI will automatically terminate on the date the principal balance of your loan is first scheduled to reach 78% of the original value of the property. If you aren't current on your loan payments at that time, PMI will be cancelled when you become current.

Also, the law states that PMI will not be required past the midpoint of the amortization period, no matter what, if your loan payments are current. In other words, if you have a 30-year mortgage and make your payments on time, PMI cannot be charged after you've paid the loan for 15 years.

This may not sound like a big difference, but...

At first glance, this may not sound like a big difference. If you buy a $300,000 home with 10% down (original loan balance of $270,000), this is the difference between paying the balance down to $240,000 or $234,000 -- not a huge difference.

However, it can take quite a bit of time to pay the loan down that extra 2%. In fact, when I plug that loan balance into a mortgage amortization calculator using today's mortgage interest rates, there is a one-year difference between when you could ask for PMI cancellation and when your lender must cancel it automatically. Since PMI can easily be over $100 per month, this means that by not being proactive about cancelling your mortgage insurance, you could literally end up paying thousands of dollars more than you have to.

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