You’ve paid your closing costs, given your realtor a hefty commission, and started paying off the mortgage on your new home. That’s when you notice a pesky monthly charge under the heading PMI (or private mortgage insurance).
Do you know what PMI is? What’s it’s for? Perhaps even more importantly, how do you remove it from your monthly mortgage payment?
For many, PMI is inevitable; the cost of doing business when buying a home with less than a 20 percent down payment (such as with the case of an FHA loan). But many qualify to have PMI removed from their monthly mortgage payments and are needlessly paying for insurance that they, or the lending institution, no longer needs.
So, here’s the straight scoop on what you need to know about removing PMI permanently, and putting more money in your pocket each month.
How to Get Rid of Private Mortgage Insurance
1. A Brief Primer on PMI
PMI, or private mortgage insurance, is an insurance policy that reimburses a lender in the case a homebuyer defaults on a loan. PMI usually becomes necessary when a prospective homebuyer purchases a home with less than a 20 percent down payment. Such as with the first-time homebuyer loan program, or FHA program, in which borrowers can put down as little as 3.5 percent on a home purchase.
It is important to realize PMI is, unlike other forms of insurance, put in place strictly to protect the lender, not the purchaser. It also does not help pay down any amount of a loan’s principal.
2. How much is PMI?
PMI is an additional monthly premium added to your monthly mortgage payment. As Investopedia details, mortgage insurance rates for these premiums fall somewhere between “.5% and 1% of the loan on an annual basis.”
For example, let’s say you’ve taken out a $200,000 loan. Your private mortgage insurance premium would be one percent of the total loan amount — nearly $2,000 a year, or $165 per month. Unlike other forms of interest, such as mortgage interest, PMI is not always tax-deductible; iIt depends on whether you are single or married, and what your total yearly income is.
The long and short of it is this: private mortgage insurance is something you want to remove from your monthly payments as soon as possible.
3. Doing the Math on PMI
PMI is not some strange, arcane system in which it’s impossible to know exactly where you stand, though sometimes it can feel that way. It’s connected to something called the loan-to-value ratio (LTV).
The LTV calculates the amount of your mortgage in relation to the value of your property. It’s a percentage number that indicates the amount of a property mortgaged. You calculate the LTV of your loan by dividing the amount of your mortgage by the value of your home.
If you have a $300,000 loan, and the value of your home is $500,000, your LTV is 60%. Unlike that math class you took in high school, a higher percentage is not better. LTV is a ratio used by underwriters to assess the risk of a borrower — the higher the LTV, the bigger the risk.
The magic LTV number, for PMI purposes, is 80 percent. Once your LTV drops to 80 percent, wonderful and financially powerful things start to happen.
4. How to Remove Private Mortgage Insurance…for Good!
There are essentially five ways to remove PMI from your mortgage payment. They include:
- Pay off 20% of your loan: Once you reach the 20 percent threshold, in which you have paid off at least 20 percent of the original note and reached the 80 percent LTV number, either through prepayments or scheduled payments, you are eligible to have PMI removed from your loan.
- New appraisal: If your home is significantly worth more now than when you purchased it, as is often the case, and you’ve built up enough equity to reach that 80 percent LTV number, you can contact your lender to have them remove your PMI. (Note: Government-backed loans are not eligible to have PMI removed due to a re-appraisal.)
- Refinance: This is another common way to remove PMI. If the value of your home has increased, it’s possible a new refinanced loan (with a lower interest rate) may represent less than 80 percent of the total value of the home; thereby giving you at least 20 percent equity. Note: It’s important to mind your due diligence to ensure this makes financial sense for you.
- Remodel: This is an often overlooked way to remove PMI. By remodeling a section of your home — bathrooms and kitchens are good places to start — you may drive up the value of your home significantly enough to be eligible to have PMI removed.
- Automatic Cancellation: As laid out in the Homeowners Protection Act, a lender must remove your PMI on the date your loan balance is scheduled to reach a LTR of 78 percent. This carries with it a few stipulations: you must stay current on all payments, it relates to “scheduled” payments and not “actual” payments, etc.
5. Jumping Through the Hoops of PMI Removal
If you’re not intending to refinance — which would, in essence, create a new loan — or waiting for the automatic cancellation that occurs when you’re slated to reach that 78 percent LTR number during your payment schedule, you’ll need to do a bit of legwork to get rid of PMI.
It would be nice if, the moment you reached an 80 percent LTR on your mortgage, a mortgage lending hand magically came down from the sky and made your PMI instantly disappear. But private mortgage insurance doesn’t work that way. For one, your lender has no incentive to remove PMI; it protects their interests and takes time to remove.
Secondly, it requires persistence — and more than a couple of forms — to (finally) remove PMI. Though each lender has a different set of procedures for how this works, here’s a quick step-by-step breakdown of how to request your lender to remove PMI if you have reached at least 20 percent equity in your home.
Note: You must be current on all payments and in good standing to be eligible for PMI removal.
- Submit a PMI cancellation request (in writing) to your lender.
- Ask them for a list of approved appraisers. Do not get an appraisal from somebody not on their list.
- Choose one of the approved appraisers to provide a new appraisal on your property. This will generally cost you between $300-$500. Don’t worry, it’ll be worth it.
- Send your lender any additional documentation, such as proof the property doesn’t have a lien on it.
- Wait for them to remove the PMI.
Crossing the (PMI) Finish Line
How long the PMI removal process takes will depend on the lender, and your particular method for removing PMI. It’s a good idea to be polite, but firm, in your dealings with your lender in regards to PMI removal.
But whatever moderate stress you incur in the process of removing your private mortgage insurance will be worth it when you see how much more money you have each month to invest in things that boost your financial future — not simply protect your lender’s interests.