I recently paid off the private mortgage insurance (PMI) on my mortgage. For me, that’s a savings of just under $200 a month…which is substantial.
Private mortgage insurance is a monthly expense tacked onto certain mortgages. It’s usually required if you made a down payment that was less than 20% of the home’s appraised value. Basically, PMI protects your lender in the event that you default on your mortgage and the lender must sell your home.
With an extra $200 a month I could buy 40 Frappuccinos; shop at Whole Foods instead of my regular grocery store; hire a house cleaner every other week; or — what I actually intend to do — put the money into my Roth IRA. If you’re tired of throwing your money away on PMI, here’s how you can get rid of it.
PMI Buster #1: Pay Down Your Mortgage
The easiest, albeit slowest, way to get rid of your PMI is by making your mortgage payments on time each month. Once your loan-to-value ratio (LTV) reaches 80%, you can contact your lender to begin the process of taking off the PMI.
Obviously, this will take some time depending on how much money you originally put down on the house.
For example, let’s say you buy a $300,000 home with no money down, on a 30 year loan at 5% interest. In this case it will take 10 years and 8 months to pay off enough to reach 20% equity.
However, if you put $15,000 down (5%), you will reach 20% equity in 8 years and 10 months.
Remember, you are aiming for 20% equity. Federal law requires mortgage lenders to notify homeowners at closing approximately how long it will take for them to reach the 80% loan-to-value assuming they make their regular monthly payments. (So dig out your old closing paperwork if you’re not quite sure.)
If you want to get the PMI off of your loan sooner you’ll have to pay down what you owe faster. Consider sending one-time lump sums to your mortgage, such as a bonus at work or your tax returns.
Note, that making small additional monthly payments won’t make much difference to getting rid of PMI. Adding $100 a month only moved up the date by one month. The time frame is just too short for small amounts to have a big impact.
PMI Buster #2: Pay Attention to Home Values
Another way to get reach 20% equity is to have the value of your home increase.
Going back to our example of a $300,000 home with zero down if the value of the home increased to $375,000 then you would have 20% equity even without making a single payment.
It’s easy to be going about your life and not pay attention to home values in your area. Once you buy a home you love it doesn’t really matter what the market value is in your day-to-day life. It’s all just paper gains until you sell anyways.
However, if you are paying PMI your home value can matter a great deal. So it’s important to pay attention. Do this by making note when a similar home in your area sells. Look it up on Zillow a few weeks after the close and see what the new owners paid. That will give you a good idea of the market.
Note that you don’t want to move too fast on this. You’ll have to pay for an appraisal so you’ll want to make sure you really do have 20% equity. I’d hate to see you pay a few hundred dollars for an appraisal for it to come back saying you only 19% equity. Be conservative when figuring these numbers.
PMI Buster #3: Add Value to Your Home
If you want to speed up the process and start saving money in the long run, you may have to shell out some cash upfront. Adding value to your home with upgrades is one way to help decrease your loan-to-value ratio. Remember, if your house is worth more money and you owe the same amount on the loan, you are getting closer to that 80% LTV where you can request that the PMI be removed from your loan.
Not every type of home improvement adds substantial value to your home. In fact, many upgrades don’t even bring you any return beyond what you spent making the upgrades.
Typically, kitchen and bathroom remodels add value, whereas things like adding pools do not. According to the National Association of Realtors, exterior remodel projects such as adding a new entry door and repainting the stucco tend to get homeowners the most return on their investment. After exterior projects, minor kitchen remodels and adding attic bedrooms bring the next best return on your money.
If you’re lucky, the increase in value of your neighborhood (whether through your neighbors’ home improvements or the increasing value of real estate) will assist you in adding value over time without you actually having to do anything. That was a big help for me. I put 5% down on my home purchase in 2012 and was able to remove the private mortgage insurance in 2013 without making any additional payments or refinancing. I did a lot of upgrades to the house and bought at the right time as the market was rising.
Next: Contact Your Lender
Once you feel that you have an 80% (or less) loan-to-value on your home, you can contact your lender using the general customer service line. Each lender has a different protocol for exactly how they process PMI removal requests. Some will ask that you pay for an appraisal and then send the appraisal in to them for review, while others will review your history of payments to make sure that you qualify prior to requesting that you pay for the appraisal.
In any case, the process isn’t free. You should expect to pay around $400-550 for an appraiser of the bank’s choosing to come out to your house, take pictures and measurements, and review the comparables in your neighborhood. The appraiser will then send his or her final opinion of value to your lender. If the value proves your LTV is 80% or less, they will remove the PMI.
Keep in mind that every lender has different rules and requirements. Many will allow you to remove your PMI if your LTV is 80% or less, but some require it to be 78% or less. This is why it’s so important to call the customer service department before you begin the process to find out exactly what you’re aiming for.
…or Wait for Them to Contact You
The Homeowner’s Protection Act states that mortgage lenders are required to cancel your private mortgage insurance once your loan has been paid down to 78% of the principal loan amount, as long as you are current on your payments. This does not apply for all FHA loans, but it does for conventional Fannie and Freddie Mac owned loans. So if you’re not in a rush and you’d rather wait for your lender to get the process started, just keep paying and they will contact you when the time comes.
If you cannot put 20% down toward a new home, PMI is a necessary (and expensive) evil. The sooner you can get rid of it, the more money you’ll have in your pocket to either pay down your mortgage faster or put toward other financial goals.
Use a combination of the three methods above to reach that 20% mark as soon as possible.