Sometimes the housing market changes radically and you end up paying mortgage on a home that has lost significant market value since it was purchased. This situation has become very common in the last few years, since the housing bubble burst and the US went into a recession. Many home owners have found themselves having to make the same large monthly payment on a home that is worth much less than before the recession. When this happens, homes become really hard to sell because their value is less than what the owners owe on their mortgages. Because of this, many homes were classified as distressed, creating large financial problems for home owners who wish to sell.
When a home buyer purchases a home and are able to put less than 20 percent down, they are typically required to purchase Private Mortgage Insurance (PMI). This is an attractive alternative for home buyers who don’t want to wait until they save more money to put as a down payment. Being underwater on your mortgage and having to pay Private Mortgage Insurance on top of the high monthly payments makes it very difficult for home owners to keep their home. Abandoning the home and buying another one, which will have a lower monthly payment, seems like a better alternative.
The Homeowners Protection Act of 1998 states that Private Mortgage Insurance can be canceled when you reach 20 percent equity in your home. When the equity in your home reaches 22 percent, PMI should be dropped automatically, but many times lenders don’t remove the policy until they are reminded. Unfortunately, many home owners don’t know this. If you are underwater on your mortgage, you can have your PMI canceled.
Qualifying to Have Your PMI Canceled
Even if your home is worth less than when you purchased it and you owe more on your mortgage than the home is currently worth, you can still have the Private Mortgage Insurance canceled. There are, however, a few qualification guidelines that you should be aware of:
- The equity in your home has to be 20 percent or larger.
- Your monthly mortgage payments must be up to date, with no missed payments.
- Sometimes it is required that you don’t have any late mortgage payments for the last 6 months.
- You must have been the owner of the home for at least 2 years.
- There must not be any second liens on your property, such as a home equity loan or a second mortgage.
- The property must not be a vacation home.
Even if the law states that the Private Mortgage Insurance must be canceled once the equity in your home reaches 22 percent, be prepared to have a difficult time getting your lender to actually do it. You have to send them several documents related to your mortgage and a letter requesting the cancellation. Your lender has all of this information already, so this is done mostly to prove to them that you are an informed customer.
Being underwater on your mortgage is hard enough without having to pay Private Mortgage Insurance, as well. Having to make the same payments on a home that is now worth significantly less than it did at the time of purchase might not make a lot of sense, unless it’s your dream home and you have become emotionally attached to it. Fortunately, by canceling your Private Mortgage Insurance you can free up some much needed cash, which will certainly make your life easier.