Posted 3:30 p.m. July 27, 1999 -- If you're a homeowner, although you may not know it, you could be paying for Private Mortgage Insurance or PMI. But a new federal law takes affect this Thursday requiring lenders to cancel your PMI if conditions apply.
Why is this so important? Because many people who buy homes these days put less than the traditional 20 percent down on the property. As a result, lenders require that these new homeowners pay for PMI, which can easily tack on over $1,000 a year onto your yearly mortgage payment. In fact, for a $300,000 house, you're probably paying about $1,400 a year for mortgage insurance.
In a situation like today's, many property values rise dramatically so that you suddenly have 20 percent equity in your home. Chances are, when this occurs, you're eligible to stop paying PMI - and put that savings back into your pocket. Many people don't even know they're paying PMI, and the result is that they continue to pay for insurance that may no longer be required.
As for this new law, don't think you can sit back and let your lender do the work. First, the automatic cancellation of PMI occurs only on loans closed on or after Thursday, July 26, 1999. You must also have a history of making timely payments and have no other loans on the house. If your home has appreciated considerably, chances are you can stop the PMI well before the law's provision kicks-in.
How do you know if you have 20 percent equity? Take the market value of the house and subtract the loan outstanding. The difference, as a percentage of the market value, is your equity. For instance, if the market value of your home is $100,000 and your outstanding loan is $75,000, you have 25 percent equity.
Despite the new law, I'd suggest taking matters into your own hands. Call your lender and see what the their criteria are for dropping the PMI payments. The money you save from cancelling your insurance can be put to better use.
Personal Finance: The Archive
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