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| The Basics | Save hundreds on your mortgage
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You may be paying for something you don't need -- private mortgage insurance, or PMI. Here's what you should know.
By Liz Pulliam Weston
You may be able to save $600 or more this year on your mortgage payments, just by getting rid of insurance you may not need and that does nothing to protect you or your home.
Each year, another 2.7 million families get mortgages with this annoying little add-on. It's called private mortgage insurance, or PMI.
PMI typically comes with a mortgage when you can't make a 20% down payment. The insurance, which costs about $50 to $80 a month for a $188,000 home (the U.S. median price), is designed to protect the lender -- not the borrower -- against the greater possibility of default in low down-payment mortgages.
Automatic cancellation
PMI isn't all bad; far from it. As the companies providing the coverage will tell you, PMI provides the protection lenders need to make loans to people who can put only 10%, 5% or even 3% down. That's allowed millions of people to become homeowners much sooner than if they had to save the traditional 20%, letting them start building equity and enjoying the other perks of homeownership.
But homeowners often pay the premiums years beyond the point where it makes any sense, and shaking the coverage can be tough -- despite a federal law that was supposed to make cancellation automatic.
That law -- the Homeowners Protection Act of 1998 -- mandated that lenders end PMI at the borrowers' request once their mortgages had been paid down to the 80% level. The cancellation must be automatic when the mortgage shrinks to 78%.
But the law applies only to mortgages made on or after July 29, 1999. More importantly, your equity is determined by comparing your mortgage balance to the home's original purchase price -- not what it's worth now.
Rising prices, falling rates
Perhaps you see why the law has helped so few homeowners. It can easily take a decade or more to pay a mortgage down to the 78% level, since most of the early loan payments cover just interest with very little going to pay down principal.
What has helped far more homeowners get rid of PMI, mortgage experts say, are rising home prices and falling interest rates. Someone who buys a $100,000 home for 10% down, for example, will have 80% equity by the time the home has risen about 12% in value. Then the owner can refinance into a regular mortgage (with a payment that's the same or lower, thanks to dropping interest rates) and ditch the loan with PMI.
Of course, rising home prices are a double-edged sword. While they help existing homeowners, they make it more likely a first-time buyer won't be able to come up with a sufficient down payment to avoid PMI.
Fannie and Freddie
Fortunately, there's another source of help for homeowners suffering from PMI: enlightened policies by two of the nation's biggest mortgage buyers, Fannie Mae and Freddie Mac.
These two companies have told their lenders to allow homeowners to use the current value of their home to determine equity levels for PMI purposes. So appreciation or even home improvements can help boost you to the 80% equity mark. This policy applies to all the loans Fannie and Freddie buy, not just the ones that closed on or after July 29, 1999.
Since Fannie Mae and Freddie Mac buy most of the home loans made in this country, chances are their policies apply to your mortgage if your balance is down to 80% or less of the current market value of your house. (You can get an estimate of your home's current value from a real estate agent or a free service like HomeGain.com.)
Tracking down the details
If you're not sure who owns your loan, call your loan "servicer," the outfit that accepts your payments, and ask. The servicer can also tell you your current mortgage balance, which can help you in your equity calculations, and outline the procedures you'll need to follow to get PMI dismissed.
Under Fannie and Freddie rules, you'll need to have a decent payment history (no payments 30 days or more past due in the last year, and none 60 days or more overdue in the past two years). And you may have to shell out $350 or so for an appraisal to confirm your home's value. But that's a reasonable investment to save $600 or more annually by canceling PMI.
What if an investor other than Fannie or Freddie owns your loan? This may well be the case if you've got a large mortgage (the limit for "conforming" mortgages typically sold to Fannie or Freddie is $359,650 this year; it was $333,700 last year). Some may allow you to ditch PMI based on current home value; ask about your lender's policies.
Other types of loans
What if you have an FHA or a VA loan? These don't have private mortgage insurance, but they do have different types of guaranty fees that typically last the life of the loan.
VA loans, for example, come with an upfront fee of 1.25% to 3% that most borrowers choose to finance. In other words, instead of paying the fee upfront, they wrap it into their loan. If that's the path you chose when you got your VA mortgage, you're stuck until you refinance.
Likewise, most borrowers finance the upfront portion of the mortgage insurance that's required on FHA loans. The upfront portion is 1.5% of the loan balance. If you refinance or sell the home within 5 years, you may be entitled to a refund of a portion of that fee; the U.S. Housing and Urban Development has a fact sheet with more information. (For loans that closed before Jan. 2, 2001, the refund period may be as long as seven years.)
FHA mortgage insurance has an additional component, besides the upfront fee: a monthly mortgage insurance payment that equals .5% of the loan amount annually. You can't appeal for this payment to be dropped based on the current value of your home, but it will be canceled automatically when your mortgage balance reaches 78% of the home's original purchase price.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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