Private mortgage insurance premiums can cost as much as 1 percent of the loan every year. That's $2,000 a year on a $200,000 mortgage. Unlike most insurance you buy, PMI doesn't protect you. Instead it protects the mortgage company against loss if you stop paying the mortgage. The good news is, PMI doesn't last forever.
If you buy a house with 20 percent down or more, you may never have to take out private mortgage insurance. At 20 percent, lenders usually assume you have enough of your own money at stake you won't want to lose the house, so there's no need for PMI. When you start out with less equity, PMI is usually mandatory. You can ask to cancel it once you've built up enough equity to keep the lender happy.
The simplest way to get rid of PMI is to continue paying the mortgage. Once you've got the loan down to the magic 80 percent figure, you can ask your lender to cancel it. You have to request it in writing, and you may need an appraisal to prove the value of the house hasn't dropped. At 78 percent, cancellation is supposed to be automatic. In practice, your lender may not think about it unless you remind him.
Paying the mortgage down to the cancellation point can take years. If you're lucky enough to live where home values are going up, you can cut the time by showing that equity has increased. Suppose you start with, say, a 10 percent down payment on a $200,000 house -- $20,000 -- and pay off $10,000 of the principle. If the house also appreciates $15,000, you have $45,000 in equity, more than enough. Your lender will definitely want an appraisal to prove your case.
When you take out a loan insured by the Federal Housing Administration, your down payment can be as low as 3.5 percent. Like private lenders, the FHA requires you take out mortgage insurance. With a 15-year fixed-rate FHA mortgage you can drop insurance as soon as your mortgage loan drops to 78 percent of the purchase price. For all other FHA loans, you need the 78 percent cutoff, but you also have to wait until after the fifth year of the mortgage. Only then can you drop your mortgage insurance.
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