There are various ways to get rid of PMI, a.k.a., private mortgage insurance. A reader posted this question on Facebook:
“Anyone have experience with getting a new appraisal done in order to remove PMI? We bought our house in 2012, have 87% LTV at the purchase price. I THINK the value has gone up enough that we’re actually at 75%, but not sure. Any suggestions on ensuring that we are there before I spend the money on the appraisal? I’m cool with accelerating a few home projects to ensure it but not sure that those would do it. Removing PMI would cost ~$450 for the appraisal but would save me about $9k from now until it drops off automatically.
The writer of the Facebook question is pointing toward one of several possibilities for getting rid of PMI. But before we get into that, what is PMI?
What is PMI and How Does it Work?
PMI is is a form of insurance that mortgage lenders use to reduce the risk of loss on low down payment mortgages. It is typically required on mortgages that represent more than 80% of a home’s value. The purpose of PMI is not to cover the entire value of the mortgage upon loss, but just a portion of it.
As an example, if a buyer puts 5% down on a home, resulting in a 95% mortgage, the lender will require a level of PMI that reduces that mortgage to something less than 80% of the home’s value. On a 95% mortgage, the lender will typically require “30% coverage”. That will reduce the lender’s exposure on the property from 95% down to around 68% (95% less [95% X 30%]).
By lowering the mortgage lender’s exposure on a high ratio mortgage loan, the lender is induced to make more high ratio mortgage loans. That’s good news if you’re going to put a minimum down payment on a house, like 3%, 5%, or even 10%.
But PMI is also expensive. For example, using a mortgage insurance rate card (from MGIC), we find that on a 95%, 30-year mortgage for a home worth $200,000, a borrower with a credit score between 680 and 719 can expect to pay $148.33 per month.
That’s $1,780 per year! It’s easy to see why anyone would want to make that payment go away.
The ability to remove PMI is actually required by law. That legal requirement comes as a result of the Homeowner’s Protection Act which was passed into law back in 1998.
A homeowner can have PMI removed in one of several ways, and the writer of the Facebook question relates to just one of them—using an appraisal to show that the mortgage is now worth 80% or less of the home’s current value.
But before we get into the specifics of how to determine the current value of your home before spending the money for an appraisal, let’s review the different ways that you can have PMI removed from your mortgage.
Pay Down Your Mortgage
One way to get rid of PMI is to simply take the purchase price of the home and multiply it by 80%, and then pay your mortgage down to that amount. So if you paid $250,000 for the home, 80% of that value is $200,000. Once you pay the loan down to $200,000, you can have the PMI removed.
According to the Consumer Financial Protection Bureau (CFPB), you must also meet the following conditions in order to have your PMI removed:
- Your request must be in writing.
- You must have a good payment history and be current on your payments.
- Your lender may require you to certify that there are no junior liens (such as a second mortgage) on your home.
- Your lender can also require you to provide evidence (for example, an appraisal) that the value of your property has not declined below the value of the home when you first bought it. If the value of your home has decreased, you may not be able to cancel PMI.
Wait Until the Mortgage is Paid Down to No More than 78% of the Original Purchase Price
Because of the Homeowners Protection Act, there is a default setting on PMI—a level at which it must be canceled automatically. The mortgage servicer is required to drop your PMI coverage when the outstanding balance of your mortgage drops to 78% of the original value of your home.
If the original purchase price on the house was $200,000, your lender is requires to cancel PMI when your loan amount drops to $156,000, which is 78% of $200,000.
This action should take place even if you do nothing in an attempt to remove the PMI. You must, however, be current on your mortgage at the time this happens, otherwise the lender is not required to remove the coverage.
Refinance the Mortgage
If you are planning to refinance your mortgage to take advantage of a lower interest rate, you may be able to have PMI removed if the value of the property has increased sufficiently that the new loan will not exceed 80% of that value.
To refinance your home, you’ll most likely need an appraisal, anyway, and you will pay for this within the closing costs of the new loan. However, the appraisal will be used as the basis of your new mortgage, as opposed to solely for the purpose of eliminating mortgage insurance.
It’s a way of killing two birds with one stone, but it will only work if the refinance makes sense, and if the property value is sufficient that PMI will not be required on the new loan.
Pay the Mortgage Down to the Midpoint of the Term
This is another automatic PMI elimination process. Even if the amount of the outstanding mortgage does not fall to the 78% level, the lender is still required to remove PMI when at least half of the mortgage term has elapsed. On a 30-year mortgage, for example, PMI must be removed 15 years into the loan, even if the mortgage balance exceeds 78% of the original purchase price of the house.
Typically, the mortgage balance is paid to something less than 78% by the halfway mark, at least on self-amortizing loans. However, if you have an alternative mortgage, such as a balloon type, or an interest only loan, you may not reach 78% even halfway through the term. No matter; the lender still required to remove the PMI, and to do so automatically. Again, though, this will only occur automatically if you are up-to-date on your mortgage payments.
Removal of PMI Does Not Apply to Government Mortgages
Before we get to the Facebook question, there is one important limitation on removal of PMI, and that is in regard to government mortgage loans. This includes loans insured by the Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA).
The ability to remove PMI applies only to conventional financing. Therefore, the only way to remove PMI from an FHA mortgage is to refinance it into a conventional mortgage that does not exceed 80% of the value of the property.
At long last, let’s tackle that appraisal question from the Facebook writer.
Prove that the Value of Your Home Has Risen
The final option for having your PMI canceled is to prove that the outstanding balance on your mortgage is 80% or less of the current value of your home. But in order to do this, you’ll have to take action.
This will include contacting your mortgage lender to determine the appropriate paperwork for removing the PMI. You must make certain you are dealing with the correct parties, and that you are complying with any lender requirements to complete the process.
This will require that you furnish an appraisal supporting the higher value of your property. The lender may also require that you made at least 24 consecutive on-time payments on your mortgage before they will remove PMI. If you bought your home very recently, double-check for this rule with your lender before you pay for a new appraisal.
Obviously, ordering an appraisal on your property will cost you some money—generally between $300 and $600, depending upon the type of property and where it’s located.
Before spending that money, you will want to do two things:
- Find out if the lender must approve the appraiser. You may not be able to simply hire an appraiser of your choice.
- Have a good idea that the property has, in fact, increased in value sufficiently to have the PMI removed.
The best way to handle the second consideration is to get a reasonable estimate of the value of the house. You can do this by interviewing active real estate agents in your area. You can also check online sources, such as Zillow.com. They will provide a “zestimate” of the value of the property, which will give you a rough idea. You can also try Trulia.com’s “How much is your home worth?” tool.
Just be careful not to rely on online estimates entirely; I’ve found that valuations on these sites can fluctuate considerably and aren’t always 100% accurate. It’s best to get valuations from both sites, and match those against estimates from real estate agents. This will enable you to get at least a ballpark on your property’s value before spending the money to pay an appraiser.
If you can demonstrate that the value of the property is sufficient to lower the mortgage value to 80% or less of the home’s current value, and the lender refuses to cooperate, you can file a complaint online with the Consumer Financial Protection Bureau (CFPB). This is a US government agency that will forward your complaint to the mortgage lender, and then work to get a response.
Have you had PMI removed from your mortgage, or are you planning to in the near future? Have you used any of these methods? Share your experience!