Understanding Your
Mortgage Statement

PMI is insurance that protects the lender, not you, in case you default on your mortgage. It is required when you put down less than 20 percent of the purchase price. The cost of PMI varies based on your credit score, loan-to-value ratio, and loan type, but it typically ranges from 0.3 to 1.5 percent of the loan amount per year. On a $300,000 loan, that is $75 to $375 per month. PMI is a significant expense that does not build equity or provide any benefit to you. Removing it as soon as possible should be a financial priority.

Under the Homeowners Protection Act, PMI must be automatically terminated when your loan balance reaches 78 percent of the original purchase price, provided you are current on your payments. This is the automatic termination date. Your lender must also notify you when you have the right to cancel PMI. The automatic termination typically happens around the midpoint of your loan term, but the exact timing depends on your amortization schedule and any extra payments you have made.

You can request PMI removal earlier than the automatic termination date. The right to request cancellation begins when your loan balance reaches 80 percent of the original purchase price. To request early removal, you typically need to submit a written request to your lender and provide evidence that your home value has not declined. This usually requires a current appraisal. If your home has increased in value since you bought it, you may be able to request removal even sooner by showing that your current loan-to-value ratio is below 80 percent based on the current market value. This is called a homeowner's request for cancellation, and it can save you years of PMI payments.

Each year, your lender reviews the actual amounts paid from your escrow account for property taxes and insurance. They compare this to the amount collected from you over the previous year. If there was a shortage, meaning the actual costs exceeded the amount collected, your lender may increase your monthly payment to cover the shortfall and build a cushion for the coming year. If there was a surplus, you may receive a refund or a reduction in your monthly payment. The analysis is designed to maintain a minimum balance in the account, typically equal to two months of escrow payments.

In most cases, escrow payments increase over time because property taxes tend to rise. In New Jersey, where property taxes are the highest in the country, annual increases are common. Homeowners insurance premiums also tend to rise over time. If your escrow analysis shows a significant increase in your monthly payment, check whether it is driven by a tax increase, an insurance premium increase, or both. Understanding the cause helps you decide whether to appeal the tax increase or shop for a better insurance rate.

Mistakes happen. If you believe your escrow analysis is incorrect, you have the right to request a detailed breakdown from your lender. Check that the tax and insurance amounts match the actual bills. If there is an error, your lender is required to correct it and adjust your payment accordingly. You can also request a voluntary cancellation of escrow if you have at least 20 percent equity in your home, though some lenders may charge a fee for this.

The most common reason to refinance is to take advantage of lower interest rates. A good rule of thumb is that refinancing makes sense if you can lower your rate by at least 1 to 2 percentage points. However, even a smaller rate reduction can be worthwhile if you plan to stay in the home for several years. Calculate the closing costs of the refinance and divide by your monthly savings to determine your break-even point. If you plan to stay in the home beyond the break-even point, refinancing is worth considering.

If your home has increased in value or you have paid down a substantial portion of your mortgage, you may have built enough equity to qualify for a lower rate or to remove PMI. A cash-out refinance allows you to borrow against your equity for home improvements, debt consolidation, or other major expenses. However, cash-out refinancing increases your loan balance and may extend your loan term, so it should be done carefully and with a clear purpose.

Refinancing from a 30-year mortgage to a 15-year mortgage can save you tens of thousands of dollars in interest, even if the interest rate is similar. The trade-off is a higher monthly payment. If you can comfortably afford the higher payment, shortening your term is a powerful way to build wealth. You can also refinance to a 20-year or 25-year term if a 15-year payment is too high. The key is finding the right balance between monthly affordability and long-term savings.