There are various ways how 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 a form of insurance that mortgage lenders use to reduce the risk of loss on low down payment mortgages. Lenders typically require it on mortgages for more than 80% of a home’s value. Basically, PMI will get the bank some of its money back if you default on your loan. PMI doesn’t cover the entire value of the mortgage, of course. If you default and go into foreclosure, the sale of the home covers a portion of the bank’s losses. But PMI can make up for the rest.
As an example, if a buyer puts 5% down on a home, 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%]).
How Much Does PMI Cost?
PMI means lenders are more likely to offer low down payment, high-ratio mortgage loans. That’s good news if you need to buy a home with anything less than 20% down.
But PMI is also expensive. For instance, we'll use this calculator to run one example number. On a $190,000 mortgage at 3.9% with a home value of $200,000, a borrower with fair credit could expect to pay $138 per month in PMI.
That's $1,656 per year!
Clearly, the more quickly you can make that payment go away, the better.
Ways to Get Rid of PMI
On most loans, you actually have to have the ability, as the buyer, to get rid of PMI. This right came as a result of the Homeowner's Protection Act which was passed into law back in 1998. However, these rules don't apply to all mortgages, including those backed by the Federal Housing Administration (FHA).
How to get rid of PMI on an FHA loan? You can still get rid of PMI on an FHA loan. It’s just a bit more complicated. We’ll talk about that in a bit.
You can get rid of PMI in one of several ways. The Facebook question-writer asks about just one of the ways to remove PMI. This option is 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%. 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.
Because of that last provision, you may want to check property values in your area before applying to have PMI removed. If they've taken a downturn since you purchased your home, the lender may require an appraisal. Often, this is worth your while and the cost. But it's best to be prepared.
Pay the Mortgage Down to 78% of the Purchase Price
Because of the Homeowners Protection Act, PMI now has a default setting. This is a level at which it a lender must cancel it 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 must cancel PMI when your outstanding loan amount drops to $156,000. This is 78% of $200,000.
This should happen 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.
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. This is true 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% before 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. But the lender is still required to automatically remove the PMI. Again, though, this will only occur automatically if you are up-to-date on your mortgage payments.
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. This will work if your new mortgage is for 80% or less of the home's current appraised value.
You’ll most likely need an appraisal to refinance your mortgage, anyway. However, you’ll use the appraisal as the basis of your new mortgage, instead of just eliminating PMI. It’s kind of a two-birds-one-stone situation. But it will only work if refinancing makes sense in the first place. And, of course, you’ll need to be sure your new mortgage is for 80% or less of the home’s current value.
Refinancing is the only option for getting rid of PMI on most government-backed loans, such as FHA loans. You'll have to refinance from a government-backed loan to a conventional mortgage to get rid of PMI. And the rule for the new mortgage's value compared to your home's value still holds true.
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. This can happen because of increasing property values, rather than because you paid your mortgage down.
However, you'll have to put in some work here. First, you may want to get a feel for property values. Talk to a local realtor or do some digging online to see if your hunch about increased property values is correct.
Then, contact your mortgage lender to get the appropriate paperwork for removing the PMI. Be sure you're following a checklist of lender requirements as you complete the process.
With this option, you'll definitely have to get an appraisal that proves your property is now worth more. Check with the lender about what must be included in the appraisal before having one done. And be prepared to shell out a few hundred bucks to the professional appraiser.
Also, double-check with your lender if you've bought your home within the past two years. Some lenders require at least two years' worth of on-time payments before they'll remove PMI. Don't pay for an appraisal before you confirm your lender's requirements.
Check if Property Values Have Increased
As I said, it's a good idea to check property values before you order an appraisal. You can do this in a few different ways. Here are some options to try:
- Ask active real estate agents in your area.
- Look at online property valuation sources, such as Zillow.com and Trulia.com. Just remember that these are rough estimates more than anything else.
What 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? Then 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!