You just bought a home, congratulations!
With most people, buying a home means having a mortgage. And for homeowners who didn’t put down a down payment of generally 20% on a conventional loan, you will need to pay what’s called Private Mortgage Insurance or PMI. However, some lenders may offer options to avoid PMI with a smaller down payment, such as lender-paid mortgage insurance (LPMI) or piggyback loans.
FHA (Federal Housing Administration) loans, which are more common for 1st time homeowners, only need a down payment of at least 3.5% of the purchase price. However, FHA loans require mortgage insurance premiums (MIP) regardless of the down payment amount.
For conventional loans, you typically need to have a 20% equity or loan-to-value (LTV) ratio falling below 80% of the original or appraised value at the time of purchase. For example, a home worth $300,000 would need to have a mortgage value at or below $240,000.
Eligibility to remove PMI
If you’ve made improvements to your home or property values have increased as they have in the last several years, you should contact your lender/mortgage servicer to find out if they will remove PMI. You should also see if they require an appraisal or if they have another method of reviewing the value.
For example, let’s say you purchase your home for $300,000, but you only put 15% down, or $45,000. You’ve lived in the house for three years, and $10,000 of your payments have gone towards the principal, while your property has appreciated 3% to $309,000. That would make your mortgage balance $245,000, or 82% of the original value and 79% of the increased value.
Either way, I would call the servicer for an evaluation.
How PMI is removed
Your PMI will automatically be removed when you hit loan-to-value (LTV) of 78% of the original value (22% equity). You must not have any secondary liens (2nd mortgage, unpaid property taxes, federal taxes, or unpaid contract work). Some services may require a minimum payment history of 1 or 2 years before it will be removed.
You may be required to have an appraisal done to prove the update/increase property value. You may 1st ask your loan servicer if they can do a free analysis with any market data they can access. If they can’t, you can have an appraisal done that could cost between $400-$600 (depending on where you live). You will want to consider how close you are to the 80% and what your savings would be. If your monthly PMI is $40 and your appraisal would cost $500, you wouldn’t want to have an appraisal done if you hit 80% LTV in the next 12 months.
If you have any questions about your mortgage, paying it down early, or whether to remove PMI or pay it off completely, you should discuss a strategy discussing them with your financial advisor at Whitaker-Myers Wealth Managers. Also, take a look at a recent video from our President and Chief Investment Officer, John-Mark Young, where he talks about how to remove PMI from your mortgage.
Removing Private Mortgage Insurance (PMI) from your Mortgage
July 15, 2024
Andrew Young
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