Banks typically make homeowners with less than 20 percent equity add private mortgage insurance (PMI) premiums to their mortgage payments. The insurance helps the lender guard against the borrower defaulting on the loan. Owners who want to lower their payments can work toward getting rid of the insurance, but doing so can be tricky.
DollarVersity explains the ins and outs of PMI, noting that owners can cancel their policies when they’ve built up 20 percent equity. Legally, mortgage holders must cancel PMI if the loan balance drops to 78 percent of the original purchase price.
Those who shell out extra payments in order to increase their equity sometimes run into hitches, though. Legally, banks can wait until the date on the original amortization schedule at which the owner’s equity would reach 20 percent to drop the insurance.
The best way to get out of PMI is to avoid it altogether, either by putting together a 20 percent down payment or taking out a second “piggy back” loan to generate the equity.
The Truth About Private Mortgage Insurance & How To Cancel It [DollarVersity]