Private mortgage insurance isn’t for you. It protects the lender in case you stop paying your mortgage. Lenders are required by law to stop charging you for private mortgage insurance when you have 22% equity in your home, but some have been known to conveniently forget.
To complicate things, if you reach 22% equity not through payments, but because real estate prices have gone up, and your house is now more valuable, you’re going to have to prove your case. The key is to ask your bank what proof it requires. You may have to gather comparable sales figures for other homes sold recently in your neighborhood or you may need to hire an appraiser to determine the new value of your home. Whatever it is, Do it!
Dropping PMI is worth it. PMI varies, but it often costs about 1 percent of the original loan amount —PER YEAR. So if your total mortgage was $500,000, you could be paying $5-thousand dollars —a year— in private mortgage insurance. Ouch. Of course, dropping PMI in this example saves you 5-thousand dollars a year —And that’s EVERY year— for the rest of the years you have that loan.
But, there’s a way to roll this savings into another strategy that saves you even more money! When your bank drops the PMI premium, keep paying that amount –but instead of paying it toward PMI, put it toward paying extra toward your mortgage principal. You are used to paying this amount anyway, so it’s a great painless strategy. Paying extra toward the principal on your loan saves you money, because soon there’s less principal to charge you interest on. You also end up paying your loan off early.
Let’s say your PMI payment was $100 a month on a $225,000 loan. If you prepaid that $100 a month —just a hundred dollars— as extra toward your mortgage principal each month, you would save $24-thousand dollars over the rest of the loan. That is the power of reverse compounding and it is one of my favorite save BIG strategies.