NEW YORK (MONEY Magazine) -
Mortgage insurance (sometimes called PMI, for private mortgage insurance) can be quite expensive -- from $16 a month to $50 a month for every $100,000 you borrow -- and it's not optional.
You have to carry mortgage insurance if you put down less than 20 percent when you buy a house. The way it works for loans made after July 1998 is that your lender must cancel your mortgage insurance once you've accrued equity in your home of 22 percent.
The wrinkle comes when the value of your home appreciates rapidly, as it's done in many parts of the country over the past few years. All of that appreciation belongs to you, not the lender, and it may boost your ownership stake above the 20 percent mark. When that happens, you should try to get rid of your mortgage insurance.
As long as you've made two full years of payments, your first move is to ask your lender to let you drop the insurance. You'll have to have your house appraised, which will probably cost you about $350.
If you plan on staying in the house (and not refinancing) for more months than it would take you to make that $350 back from the savings you'll accrue after cancelling your PMI, it makes sense to proceed.
But first you'll want a good indication that you're right about the value of your home. So check the sale prices of comparable homes in your neighborhood, visit a Web site like Domania.com or call a realtor to learn what your house would list for.
Your lender may decline your appraisal or require a second one. But if you have a very large mortgage and hefty PMI premiums -- say, a $500,000 mortgage and a monthly PMI bill of $250 -- you can recoup your appraisal costs in a matter of months.
There is another option: a refi. When you refinance, your house is appraised. That seals the value. As long as you borrow less than about 80 percent of the value of your home, you'll need no insurance on the new mortgage.
But is it worth doing? It's a cost-benefit question, like all refis. You need to ask yourself: How do the refinancing costs stack up against my monthly savings on PMI? How long will it take for this transaction to pay off? Will I be in the house long enough to benefit?
Again, you're most likely to come out ahead if you have a jumbo mortgage and high PMI premiums.
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