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 mortgages for home purchases in which you made a down payment that was less than 20 percent of the home’s appraised value. Basically, PMI protects your lender in the event you default on your mortgage and the lender must sell your home.
Though PMI is tax deductible through the end of 2013, most homeowners would rather save that money each month than have another write off come tax time. For an extra $200 a month, I could buy 40 more Frappuccinos each month, I could shop at Whole Foods instead of my regular grocery store, hire a housecleaner to clean my house every other week or — what I actually intend to do — I can 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 No. 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 percent, 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. If you put no money down, it’s probably going to take — at the very least — several years more than if you put 5 percent or 10 percent down at the time of purchase.
Remember, you are aiming for 20 percent equity. Federal law requires mortgage lenders to notify homeowners at closing approximately how long it will take for them to reach the 80 percent 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 faster, pay down what you owe quicker by making one extra mortgage payment each year or putting your annual bonus towards your mortgage.
PMI buster No. 2: 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 up front. Adding value to your home with upgrades is one way to help decrease you 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 percent 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 home owners 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 percent 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 percent (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 percent 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 percent or less, but some require it to be 78 percent 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 percent 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 percent down towards a new home, PMI is a necessary (and expensive) evil. The sooner you can get it off your loan, the more money you’ll put back in your pocket to put towards other savings goals.