Attorney
Home prices are skyrocketing nationwide thanks to low mortgage interest rates, strong demand, and limited supply. According to the National Association of Realtors, 88 percent of metropolitan areas in the U.S. saw double-digit price increases in the fourth quarter of 2020 compared to the fourth quarter of 2019. Realtor.com reports that as of April 3, 2021, median listing prices have increased more than 17 percent since April of last year.
The bottom line is that your home could be worth considerably more than you paid for it. How much more? You can get a rough idea quickly by going to a website like Zillow.com and entering your address. The site will immediately provide you with a “Zestimate” of your home’s current value.
Now let’s look at what this means for those of us who carry Mortgage Insurance, beginning with an unfortunate truth: Mortgage insurance doesn’t protect the homeowner, it protects the lender. As the homeowner, you don’t benefit from having mortgage insurance (other than the fact that it probably allowed you to purchase the home with a relatively small down payment).
So, you don’t want mortgage insurance. The question is, how do you get rid of it? Basically, it comes down to this: You must have 20 percent equity in your home. If you make payments long enough, you will eventually reach that magic 20 percent. Or you could make a lump sum payment on your principal to achieve 20 percent equity. Finally, your home could increase in value to the point where your current equity reaches 20 percent without you doing anything all.
Consider the following example. You bought your home in April of 2020 for $300,000. You put 5 percent down ($15,000), meaning you originally had 5 percent equity in the home. However, your home has increased in value by 17 percent (the median 12-month increase cited by Realtor.com) and is currently worth $351,000, or $51,000 more than you paid for it. $51,000 plus $15,000 (your original down payment) gives you $66,000 in equity—well over the 20 percent required to eliminate your mortgage insurance. (20 percent of $300,000 is $60,000.)
Of course, your lender is unlikely to accept Zillow’s Zestimate of your home’s value. The best approach is to call the lender, tell them you’re looking to eliminate your mortgage insurance, and ask them for the name of an appraiser whose estimate they will accept. Chances are, your lender will cancel your mortgage insurance when they approve the appraisal and see that you have achieved 20 percent equity.