With the increasing popularity of FHA and DVA loans, as well as conventional loans which require the borrower to put down less than 20%, many homeowners find themselves paying a monthly mortgage insurance or PMI. Depending upon the size or type of loan, these payments can average anywhere from around $40 a month to well over $100, and unfortunately don’t do anything to reduce the principal amount of your loan. Because of this, it’s no surprise that a very common question for realtors and loan officers is “How can I get rid of my PMI?”
First off, it’s important to understand what exactly mortgage insurance is, and how it is calculated. Any time you put less than 20% down on a home, your lender is going to require you to get mortgage insurance. You can also be required to purchase mortgage insurance if you refinance your loan and end up with less than 20% equity in your home. If this is purchased through a private company it is referred to as private mortgage insurance, or PMI. Mortgage insurance exists to reimburse the lender in the event that you default on your loan, NOT to reimburse the borrower. The cost is typically somewhere between .3% and 1.5% of the original loan amount per year based on things like your credit history, the size of your down payment, and the insurer. These payments may or may not be tax deductible depending upon the year and the decisions of congress. Depending on your loan, you may have to pay some of these costs up front as well as have a monthly payment. When you originally take out your loan, along with your estimated monthly costs, the lender should tell you exactly how long it will take to pay down the principal far enough to have the PMI removed, and each year they should give you information on who to contact in the event that you want to remove your PMI before the originally scheduled date.
One common bit of information you may hear is that once you have at least 20% equity in your home you will stop paying a monthly mortgage insurance premium, but in reality it isn’t quite that simple. For a typical conventional loan, you can request removal of PMI when the principal balance on your loan reaches 80% or less of the value of your home when the loan was originated. That means if you bought a $100,000.00 home with a $10,000.00 down payment, you can request to have your PMI removed when you reach a principal balance of $80,000.00. Once you get below 78% the lender is required by law to remove it whether you make a request or not. FHA loans however will have a different set requirements based on what year the loan was originally applied for. Some loans may require PMI for the full duration of the loan, or may allow it to be removed after a certain time frame, or when you reach that 78% of your original loan-to-value ratio. DVA loans typically require payment of the PMI upfront and as a result it cannot be removed further down the line, and will not be refunded based on payments or principal amounts.
So how do you remove your PMI early? Some lenders may let you pay off part of your principal early, allowing the removal of your PMI ahead of schedule. Depending on the type of loan you have this may not be allowed, so you should clarify your situation with your lender before doing so. Minnesotans are also fortunate in that state law, unlike federal law, allows for you and your lender to take appreciation into account when determining your current LTV ratio. If your home is worth more now than it was when you originally purchased it, you may not need to pay your principal down to 80% of the original value. If the value of your home has gone up through appreciation or improvements to the home, you can request to have an appraisal done to determine the new value. Each lender will have their own specific guidelines, but in general if you owe less than 75% of the current appraised value (80% if you have owned the home for five years or more), you can request to have the PMI removed. This means that if your $100,000.00 home increases in value to $120,000.00 you may now only need to pay down your principal to $90,000.00 to request removal. If you find yourself in this situation, you might also want to consider the option of refinancing your loan. Not only will you remove the PMI, but you can take advantage of your newfound equity and the current low interest rates to reduce your monthly mortgage payment as well.
It’s important to note that in most if not all cases, the cost of the appraisal will be paid for by the homeowner. Typically that can range anywhere from $300 to $500 or more, so you don’t want to throw that kind of money around repeatedly. You will want to be confident that the value of your home is high enough to meet your lender’s standards before ordering the appraisal. I’d recommend you talk to a Realtor about the current conditions in your local market for homes similar to yours before making a decision. You’re also going to want to talk to your lender first and find out exactly what they require based on your loan and individual situation.
A few last things to consider: Most lenders will require that you own the home for at least 2 years before making a request to remove your PMI, and you need to make any requests in writing to get the process started. You’ll also need to be current on payments and show a solid payment history, usually between 12 and 24 months. You can’t have any liens against the home, such as a mechanics lien, home equity loan or line of credit. Additionally, if you are deemed to be at high risk of default or have turned the home into a rental property you may have additional requirements to fulfill. The best thing you can do if you are interested in getting the process started is to reach out to your lender. You can also get more information from the office of Minnesota Attorney General Lori Swanson
If you’re curious about current market conditions in your area and how they may be affecting the value of your home, please feel free to reach out to me at 763.242.9237 or by email at SteveNanninga@kw.com