Many financing options are available for a home buyer. A buyer who has adequate cash reserves can make a hefty down payment, and a buyer with little or no cash can take advantage of programs that require a small down payment. A buyer who makes a down payment of 20 percent or less of the home's value is usually required to carry private mortgage insurance.
Private Mortgage Insurance
Private mortgage insurance protects your mortgage lender if you fail to make your mortgage payments. Lenders require PMI when a home loan closes without the buyer making a down payment of at least 20 percent. The PMI premium, which the buyer pays, is based on such factors as the size of the buyer's down payment, the type of mortgage loan and the amount of insurance required. PMI makes it possible for buyers to finance a home purchase with a down payment of as little as 3 percent to 5 percent.
Accelerating Mortgage Payments
One way to accumulate the 80 percent equity necessary to terminate your PMI obligation is to accelerate your mortgage payments. By making extra principal payments on your mortgage, you increase equity and reduce the amount of time that you will have to make PMI payments. Once you have reduced your principal loan balance to 80 percent of the original amount borrowed, you may notify your lender and request that PMI be terminated.
Making Home Improvements
Another way to accumulate enough equity to terminate PMI is to improve your home to make it more valuable. Adding more square footage or making other renovations and improvements that add value to your home may increase its market value enough to raise your equity to at least 80 percent. The market value appreciation of homes in your neighborhood also may enhance the value of your home to get you closer to the 80 percent equity requirement.
Terminating Private Mortgage Insurance
Your lender may terminate your PMI when you have accumulated at least 20 percent equity in your home. You can't "pay down" your PMI incrementally as you accumulate 5 percent, 10 percent or 15 percent equity. Once your equity reaches 20 percent, the procedure for terminating your PMI obligation depends on the terms of your loan and the type of loan you have. In some cases, a home appraisal may be required. In others, you may be required to pay PMI for a minimum amount of time, regardless of how much equity you accumulate. Contact your lender for details specific to your loan.
Marilyn Lindblad practices law on the west coast of the United States. She has been a freelance writer since 2007. Her work has appeared on various websites. Lindblad received her Juris Doctor from Lewis and Clark Law School.