Canceling an insurance policy doesn't really seem like a good idea at first glance. Unless you're getting a new policy with better coverage or a lower premium, it doesn't make sense to cancel your protection. That is unless you're canceling a private mortgage insurance, or PMI policy.
PMI is an insurance policy required on conventional loans when the buyer has less than 20 percent down. If the loan with PMI ever went into default, the mortgage company would be able to recover a portion of the defaulted loan. Because PMI is in fact insurance, there is a premium, typically paid by the buyer each month. On a $200,000 purchase with 10 percent down, the monthly premium is about $100. But PMI doesn't last forever. It's removed when the loan balance represents 80 percent of the current value of the property.
Lenders are required to remove PMI automatically as the mortgage loan is gradually paid down to 78 percent of the original purchase price. However, this gradual pay down can take some time, more than 10 years for most 30 year fixed rate loans.
Yet PMI can be removed at the request of the borrower if the current loan balance can be shown to be below 80 percent of the current value of the property. This magical 80 percent level may be attained by property appreciation, principal reduction or both.
For instance, if the loan balance is $100,000 and the property values increased to $125,000, then PMI can be cancelled and no longer required. To cancel the policy, contact the lender and tell them you want your property appraised in order to cancel PMI. There will be some paperwork to complete and you'll likely pay a small fee to process and appraise your property.
If the value indeed comes in as hoped or the loan balance has been paid down below 80 percent of the newly appraised value, then it's okay to cancel PMI. PMI did its job, not it's time to move on without it.
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