How to profit from home appreciation

There are many ways to save money, but taking advantage of a run-up in home prices isn't usually on any financial planner's list. However, appreciating property values can offer at least two ways to save money.

Many homebuyers today, especially first-timers, purchase homes with less than 20 percent down payments. In such situations, lenders require buyers to buy private mortgage insurance, or PMI, and to set up an escrow account to pay homeowners insurance and property taxes until you have more than 20 percent equity in the house.

It can take up to 10 years to reach the 20 percent equity point on a standard 30-year loan. However, when home values are appreciating, as they are in most markets nationwide, that point can be reached much sooner.

Dropping PMI and the escrow account could save hundreds of dollars a year in insurance premiums and interest earnings. On average, PMI adds $50 to $100 to monthly mortgage costs, about $5,000 to $10,000 over the life of the loan.

As for interest earnings, some lenders do pay modest interest on escrow accounts, but not as much as homeowners could earn by saving money for property taxes and insurance themselves.

Because of new federal legislation requiring lenders to be more vigilant about canceling PMI on loans of 80 percent or less, most lenders have set up guidelines for consumers.

In most cases, a property must be reappraised to prove its new higher value. Appraisals cost between $300 and $400. Still, that cost is minimal relative to the long-term cost of PMI, especially if appreciating property values make it unnecessary.

Canceling an escrow account may take more time, depending on the lender. However, it is worth pursuing while property values are on the upswing. Once the account is canceled, it is wise to set up an automated monthly withdrawal of funds for future property taxes and homeowners insurance into some kind of interest-bearing account.

Property taxes usually come due twice a year while homeowners insurance premiums vary. Until those bills are due, the funds could be earning interest. Over the course of a standard 30-year loan, the interest could total thousands of dollars of extra savings.

Not only could such savings pay for a child's college or a terrific vacation, but some could be put toward paying off the mortgage early, too.

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