When you take out a mortgage, especially with a down payment of less than 20%, you are typically required to pay for mortgage insurance. This insurance protects the lender in case you default on your loan. However, many homeowners are unaware of what happens to this mortgage insurance once they have paid down their loan to the point where they have built up 20% equity in their home.
After reaching a 20% equity position, you may be eligible to cancel your private mortgage insurance (PMI). PMI can be a significant monthly expense, and eliminating it can provide immediate savings on your mortgage payment.
To initiate the cancellation process, you will need to contact your lender. Most lenders have specific requirements that must be met for PMI removal, which often include:
It is worth mentioning that some lenders automatically terminate PMI once your loan balance reaches 78% of the original value of the home. However, it's always a good practice to monitor your equity position and proactively communicate with your lender to ensure you're not missing out on potential savings.
If you believe you have reached this threshold, you may want to consider getting a new appraisal if your home has significantly increased in value since your purchase. A higher appraised value can work in your favor and help you surpass that 20% equity benchmark more quickly.
In summary, once you pay off 20% of your loan, you can take actionable steps to remove your mortgage insurance. This is an important move that can free up funds for other financial goals, from saving to investing or paying down other debts.
