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Private Mortgage Insurance is required on loans when you have less than 20% equity. However, we also offer Lender Paid Mortgage Insurance. That is when you pay a slightly higher interest rate and do not make separate mortgage insurance payments. What is the advantage of a higher interest rate? First of all, the additional interest is tax deductible and the private mortgage insurance may not be. Second, the payments are usually lower for with Lender Paid Mortgage Insurance than with PMI. We always try to look at all possibilities available to you to make suggestions and be sure you know all of your options.
Lenders are required by federal law to automatically cancel Private Mortgage Insurance (PMI) when the loan balance falls below 78 percent of your purchase price — not when you achieve 22 percent equity, which will happen much more quickly in times of rising property values. (Certain "higher risk" loans are excluded.) But you have the right to cancel PMI (for loans made after July 1999) once your equity reaches 20 percent, regardless of the original purchase price. This is a hard issue in the recent market of falling home prices. Certainly there are lots of homeowners who had hoped to have enough equity in their homes to have their PMI cancelled and must now continue to pay it until their values go back up. However, keep in mind that regardless of what your current equity position is, if you have paid the mortgage balance down to 78% of your original purchase price you can have the PMI payments cancelled. The fastest way to do this, is by making extra principal payments. Otherwise it might take you 10 years to get to that point. Keep track of your principal payments. Also keep track of what other homes are selling for in your neighborhood. If your loan is under five years old, chances are you haven't paid down much principal — it's been mostly interest.
When you think you've reached 20 percent equity in your home, you can begin the process of freeing yourself from PMI payments! You will need to notify your mortgage lender that you want to cancel PMI payments and you'll need to submit proof that you have at least 20 percent equity. A state certified appraisal on the appropriate form (URAR- 1004 uniform residential appraisal report for single family homes) is the best proof there is — and most lenders require one before they'll cancel PMI. DO NOT TRY TO ORDER AN APPRAISAL YOURSELF, until you've contacted the lender. They may have particular methods or restrictions by which it must be done, or they may choose to do this with an Automated Valuation Model. Please let us advise you on this. Remember we are always here to help!