Here’s a way to save on mortgage insurance

NEW YORK – If you’re tired of making monthly payments toward private mortgage insurance, you may have an out.

While these payments are irksome for many borrowers – they aren’t tax-deductible – they do help people buy homes they couldn’t otherwise afford by allowing them to put less money down upfront. Indeed, lenders have traditionally required borrowers to pay mortgage insurance if they borrow more than 80 percent of the home’s price to protect against default.

However, house prices have kept rising in many parts of the country. The median U.S. home price has risen 25 percent over the past four years; prices in some urban areas have gained even more. So now’s the best time to evaluate whether that appreciation might present an opportunity to cancel your policy.

Borrowers can ask to have their private mortgage insurance canceled once they effectively own 20 percent of the house.

“Through a combination of paying (off your mortgage) and home price appreciation, you might be able to cancel the insurance within as little as two years,” says Keith Gumbinger, a vice president at HSH Associates, financial publishers in Pompton Plains, N.J.

Many consumers – notably first-time homebuyers in today’s hot real-estate markets – simply can’t manage to come up with the traditional down payment of 20 percent. In fact, the median down payment for a first-time homebuyer is 3 percent, according to a survey conducted by the National Association of Realtors.

The insurance can be quite expensive. For instance, putting $30,000 down on a $350,000 home (at a fixed rate for a term of more than 25 years) translates into a loan-to-value ratio of 91.43 percent. This would require a monthly private mortgage insurance payment of $208, according to the PMI Calculator on HSH’s Web site.

There are a few factors that need to be considered before ordering up a home appraisal for $350 or so.

Greg McBride, a senior financial analyst at Bankrate.com, notes that lenders often require you to keep the insurance for a certain period, typically between one and five years.

Naturally, borrowers must have a respectable payment history in order to qualify for a cancellation, nor can there be a second mortgage out on the home.

There are very few loans that require insurance for the entire loan term, but there are some exceptions, according to the Mortgage Insurance Companies of America, a mortgage insurance industry trade group. Some loans, such as certain low-down-payment loans through Fannie Mae, Freddie Mac and the Veterans Administration, are exempt from cancellation laws, according to Mortgage Insurance. And “lender paid” mortgage insurance, or when the insurance is paid by your lender, translating into a slight higher interest rate on the loan, can’t be canceled during the loan’s lifetime.

Meanwhile, the Homeowners Protection Act of 1998 requires servicers to automatically terminate coverage on most loans originated after July 29, 1999, when the loan is paid down to 78 percent of the house’s original value, Mortgage Insurance says on its Web site. It also has a calculator that estimates how long it will take to get your PMI automatically canceled.