What Is Home Equity?

Home equity is the portion of your home that you own outright. It generally increases in two ways: as you make mortgage payments and reduce your principal balance, and when your home's market value increases.

For example, if your home is currently worth $500,000 and you owe $400,000 on your mortgage, you have approximately $100,000 in equity.

That equity can become an important financial resource over time. However, you do not necessarily need to borrow against it to benefit from it.

Could Your Equity Help You Remove PMI?

PMI is commonly required on Conventional mortgages when a borrower puts less than 20% down. It protects the lender if the borrower stops making payments, but it adds to the homeowner's monthly housing expense.

As you pay down your mortgage and your property potentially appreciates, your loan-to-value ratio may decrease enough to qualify for PMI cancellation.

Federal law generally allows eligible homeowners to request PMI cancellation when their scheduled mortgage balance reaches 80% of the home's original value, provided applicable requirements are met. PMI generally must automatically terminate at 78% of the original value when the borrower is current on payments.

In some situations, appreciation in the home's value may also help a homeowner request cancellation earlier. However, this is not automatic. Your mortgage servicer may require an appraisal or another approved valuation and may have additional requirements.

A Simple Example

Imagine you purchased a home for $500,000 with 5% down, leaving you with a $475,000 mortgage.

Several years later, your mortgage balance has decreased while the home's value has increased. If the property is now worth $570,000 and you owe $456,000, your equity is approximately $114,000.

At that point, it may be worth contacting your mortgage servicer to ask whether you could qualify to have PMI removed based on the current value of the property.

How Much Could Removing PMI Save?

The savings depend on your original loan amount and PMI rate, but eliminating PMI can make a noticeable difference in a homeowner's monthly budget.

For example, PMI on a $400,000 mortgage could cost approximately:

• 0.5% annually: about $167 per month

• 1% annually: about $333 per month

• 1.5% annually: about $500 per month

Even a $333 monthly reduction adds up to nearly $4,000 per year. Those savings could instead go toward your mortgage principal, home improvements, savings, or other household expenses.

Your actual PMI cost and cancellation requirements will depend on your specific mortgage.

What About FHA Mortgage Insurance?

It is important to distinguish PMI on Conventional loans from mortgage insurance associated with FHA loans.

FHA mortgages have different mortgage insurance requirements and cancellation rules, so homeowners with an FHA loan should not assume that reaching a certain amount of equity will automatically eliminate their mortgage insurance.

If you are unsure which rules apply to your mortgage, your loan servicer or mortgage professional can help you understand your options.

Other Ways to Use Your Home Equity

Removing PMI is not the only potential benefit of building equity. Qualified homeowners may also have access to financing options that allow them to use some of their equity for larger financial needs.

Depending on your circumstances, these may include:

• Home equity loans: Receive a lump sum while keeping your existing first mortgage.

• HELOCs: Access funds as needed through a revolving line of credit.

• Cash-out refinancing: Replace your existing mortgage with a larger loan and receive the difference in cash.

Each option has different costs, rates, repayment structures, and qualification requirements. Using home equity also means taking on debt secured by your property, so it is important to consider the long-term impact before moving forward.

Start by Finding Out What You May Qualify For

If your home has increased in value since you purchased it, don't assume that your current mortgage payment has to stay exactly the same.

A good first step is to review your current mortgage balance, determine whether you are still paying PMI, and contact your servicer to ask about the requirements for cancellation. A Premier Plus Lending loan officer can also help you understand how your equity and current mortgage fit into your broader financial options.

The Bottom Line

Building home equity can provide more than long-term wealth. For some homeowners, it may also create an opportunity to reduce monthly housing costs by eliminating PMI.

If you have questions about your mortgage, home equity, or potential ways to lower your monthly payment, connect with a Premier Plus Lending loan officer for personalized guidance based on your situation.