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Is it Time to Cancel Your Mortgage Insurance?

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Posted: Sunday, December 29, 2013 10:00 pm | Updated: 1:32 am, Wed Jan 1, 2014.

(Family Features)  Mortgage insurance is a policy lenders may require you to buy when you take out a home loan. This policy will protect them should you default on payments. Although you must pay the premiums, the insurance policy offers you no protections. If the house were to go into foreclosure, only the lender's interest in the property would be addressed.

Anyone making a down payment of less than 20 percent of the appraised value or sale price of a house is required to purchase mortgage insurance. Several companies underwrite private mortgage insurance, known as PMI. The main government mortgage insurer is the Federal Housing Administration.

Most people aren't even aware how much this insurance premium costs them each month. Consider one couple who made a 10 percent down payment on a $200,000 house. They were required to purchase mortgage insurance on the $180,000 borrowed and were charged an annual premium of 0.50 percent. The insurer multiplies the loan amount by 0.005, for an annual premium of $900.00. That works out to a monthly payment of $75.00.

It's important to keep track of your loan balance and home value. Once you reach the point where the loan-to-value ratio hits 80 percent, ask your lender to discontinue the PMI premiums. Federal law requires lenders to tell the buyer at closing how many years and months it will take for them to reach that 80 percent level and cancel PMI. But fluctuations in home values or making extra payments may mean you hit this point sooner than expected. Lenders must automatically cancel PMI when the balance hits 78 percent.

Talk to several mortgage lenders when shopping for a home loan. They will be able to educate you on mortgage insurance and explain potential tax savings. Lenders may also offer suggestions on how to avoid PMI payments altogether.

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