YOU ASK:

Should I take out a home-equity line of credit to pay down my mortgage to eliminate PMI?

WE ANSWER:

Before you consider this, have your home appraised first. Take note that mortgage insurance may be eliminated if your equity is at 20%. If it has been paying your mortgage for quite a while now, it is good to check what your loan-to-value percentage is. That way, you keep track of just about how long or how much you need in order for you to eliminate PMI.

If the property has increased since you bought it, you may be surprised that your equity is already at 20%. This means, you don't need to take out a home-equity line of credit, you already meet the requirements to take out private mortgage insurance.

We recommend that you do your best to get rid of private mortgage insurance. This, to us, is an unnecessary expense (at least from the point of view of the home buyer). From the point of view of the lender, this is necessary, since it will want to protect the loan it granted to you.

You should contact your bank to ask when you can eliminate PMI - there may even be a requisite two years before you are allowed to do so. If it looks like you will need quite a while before you fulfill the requirements of cancelling PMI, you can study whether using a home-equity line of credit (HELOC) to increase equity to 80% is better than paying for the insurance premiums. It may be that you pay more in interest over time as compared to mortgage insurance. Make the necessary calculations, when you find out that you are able to pay the balance on the HELOC more quickly than having insurance for the two years, then having a HELOC may be a better choice.

Another option you can consider would be to work towards paying more of the principal. Whatever extra money you have, you should pay it towards lowering the balance of your mortgage. That way, you are increasing your equity on your home and also making it faster for you to reach the required 20% so that you can get rid of the PMI. You are also saving yourself from having to pay for more interest.

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