How to Gain Equity and Terminate a Mortgage Insurance Policy
Home buyers usually want to terminate the extra cost of mortgage insurance as soon as they are able. Federal law dictates that a home owner can cancel the insurance when at least twenty percent equity has been reached in a property. Additionally, once a borrower reaches twenty-two percent equity, the lending institution is mandated to cancel the insurance.
There are several paths to reaching twenty percent equity in your property quickly and save money on insurance payments. The most straightforward path is simply to pay off your mortgage. If your down payment is less than twenty percent of your property’s value and you are paying for insurance, you may want to make larger mortgage payments at the beginning of your mortgage period. Consider overpaying—i.e., paying more than the minimum owed—to the extent that you are able until the sum of your mortgage payments and down payment equals at least twenty percent of your property’s value. The sooner you pay down your mortgage, the sooner you can cancel the insurance and save money.
You can also gain equity in your home if your home’s value increases. Even though the value of your mortgage remains the same, the ratio of your mortgage to your home’s value will decrease. Once this ratio is under eighty percent, you can stop paying mortgage payments.
If the value of homes sold in your neighborhood has improved, your home’s value may also go up. When you think that your home’s value has increased, you can schedule an appraisal. This is a formal process to determine the value of your property. If the appraisal shows that your home’s value has increased to the extent that you now have twenty percent equity in your property, you can use the appraisal as proof to your lender to discontinue your insurance policy.
Your property’s value can also increase if you rehab any
structure or make other home improvements. While home improvements
cost money, you will often save money over the long term if you
invest in your property, gain equity, and cancel your insurance.
After making home improvements, you will need an appraisal to prove
to your lender that you have gained enough equity to cancel your
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