NEW YORK (
TheStreet) -- Private mortgage insurance is the expense all homeowners hate. You pay for it but only the lender benefits, collecting an insurance claim if you default on your mortgage. You can't even shop for your own insurer; that's done buy the lender, who has no stake in keeping the premium low.
Typically, PMI costs around 0.5% of the home's value per year, often adding many thousands to the expense of owning a home over time.
Fortunately, it's possible to wriggle free of this requirement. And the robust rise in home prices over the past year, plus the effects of low mortgage rates, may enable you to cancel your PMI much sooner than you think. Just be sure not to step in a hole along the way, by missing a mortgage payment or taking out a home equity loan.
It all comes down to the amount of equity you have in the home or the difference between the home's current value and the debt remaining on your mortgage. If you owed $160,000 on a $200,000 home, you'd have 20% equity. PMI is required if equity is below 20%, and the PMI premium can be higher if equity is substantially below that level.
A federal law passed in 1999 requires lenders to cancel PMI automatically when the loan balance falls to 78% of the value of the property at the time the loan was made. If the borrower requests it, the lender must cancel when the balance falls to 80% of that starting value. Most importantly, Fannie Mae and Freddie Mac, the companies that own or back most mortgages issued in recent years, allow cancellation based on the home's current value rather than the value when the loan was made. That allows the homeowner to benefit from rising home prices. "You can terminate after two years if the loan balance is no more than 75% of current appraised value, and after five years if it is no more than 80%," Jack M. Guttentag, emeritus finance professor at the Wharton School, says on his website The Mortgage Professor. Because home values are up by about 12% in the past year, you may have passed one of these thresholds without knowing it. And if you have a low mortgage rate, you are building equity faster than if the rate were higher. That's because when the rate is low, more of each month's payment goes to pay down the loan's balance, or principal.
The Mortgage Loan Calculator shows how this works. Imagine you bought a $100,000 home with 10% down, taking out a $90,000 mortgage. That would give you 10% equity at the start, leaving you subject to the PMI requirement. If the loan charged 7% interest, it would take almost nine years for your payments to reduce the loan balance to less than $80,000, to give the 20% equity needed to cancel PMI. But if the rate were only 3.5%, the low hit last spring, you'd have 20% equity in less than six years. A rising home value might speed the process even more if you had a Fannie or Freddie loan. Unfortunately, if you have a Fannie or Freddie mortgage and want to calculate based on the home's current value, you'll have to pay for an appraisal by a firm acceptable to the lender. It could cost several hundred dollars, but be worth it if it saves years of PMI payments. To avoid shelling out unnecessarily, use sites such as Realtor.com, Zillow.com and Trulia.com to make your own estimate of the home's current value. You also might ask the real estate agent who helped you buy the home. Also be sure not to run afoul of one of the other rules. The lender doesn't have to lift the PMI requirement if you've had seriously late payments in the past year or two. Generally, it will be tougher to terminate PMI if you've taken out a home equity loan or no longer live in the home yourself. Your lender can provide details on its termination policies.