I recently paid off Private Mortgage Insurance (PMI) on my mortgage. For me, that’s a savings of just under $200 a month… which is significant.
Private mortgage insurance is the monthly expense associated with certain mortgages. This is usually required if you have made a down payment of less than 20% of the home’s appraised value. Essentially, PMI protects your lender in the event of a mortgage default and the lender must sell your home.
With an extra $200 a month, I could buy 40 frappuccinos; shop at Whole Foods instead of my usual grocery store; hire a cleaning lady every two weeks; or – which is exactly what I’m going to do – invest in my Roth IRA. If you’re tired of throwing away your PMI money, here’s how you can get rid of it.
PMI Buster #1: Paying off your mortgage
The easiest, albeit slowest, way to get rid of your PMI is to make your monthly mortgage payments on time. Once your loan to value ratio (LTV) reaches 80%, you can contact your lender to begin the PMI withdrawal process..
Obviously, this will take some time depending on how much money you originally invested in the house.
For example, let’s say you buy a house for $300,000 with no down payment on a 30-year loan at 5% per annum. In this case, it would take 10 years and 8 months to pay back enough to reach 20% equity.
However, if you invest $15,000 (5%), you will reach 20% net worth in 8 years and 10 months.
Remember that you are aiming for 20% equity. Federal law requires mortgage lenders to notify homeowners at the close of a deal about how long it will take them to reach 80% of the loan to value, assuming they make their regular monthly payments. (So dig out your old closing documents if you’re not entirely sure.)
If you want to get PMI on your loan sooner, you will have to pay off what you owe faster. Consider sending lump sums for a mortgage, such as a bonus at work or tax returns.
Please note that small additional monthly payments will not make a big difference in getting rid of PMI. Adding $100 a month only moved the date forward by one month. The time frame is too short for small amounts to have a big impact.
Read more: Mortgage basics – everything you need to know
PMI Buster #2: Pay Attention to Home Value
Another way to get up to 20% equity is to increase the value of your home.
Going back to our $300,000 house example with zero down payment, if the value of the house increases to $375,000, then you have 20% equity even without a single payment.
It’s easy to go about your life and not pay attention to the home values in your area. When you buy a house that you like, it doesn’t matter what its market value is in your daily life. It’s just paper profit until you sell anyway.
However, if you pay PMI, the value of your home can make a big difference. Therefore, it is important to pay attention. Do this by noting when a similar house in your area is for sale. Check it out on Zillow a few weeks after closing and see how much the new owners paid. This will give you a good idea of the market.
Note that you don’t want to move too fast on this one. You will have to pay for an appraisal, so make sure you actually have 20% of the capital. I wouldn’t want you to pay a few hundred dollars for an appraisal to get it back saying you only have 19% equity. Be careful when calculating these numbers.
PMI Buster #3: Add value to your home
If you want to speed up the process and start saving money in the long run, you may need to shell out some cash up front. Increasing the value of your home with upgrades is one way to lower your loan-to-value ratio. Remember that if your home is worth more money and you owe the same amount on a loan, you are approaching 80% LTV when you can request that PMI be removed from your loan.
Not every type of home improvement adds significant value to your home. In fact, many upgrades do not bring you any profit other than what you spent on those upgrades.
Typically, kitchen and bathroom renovations add value, while things like adding pools do not. According to the National Association of Realtors, exterior renovation projects, such as adding a new front door and repainting the stucco, tend to give homeowners the highest return on their investment. After the outside projects, a little kitchen remodeling and the addition of attic bedrooms will bring the most bang for your buck.
If you’re lucky, increasing the value of your neighborhood (whether by improving your neighbors’ home or increasing the value of your property) will help you add value over time without having to do anything. This was a great help for me. In 2012, I invested 5% to buy a house and was able to withdraw private mortgage insurance in 2013 without any additional payments or refinancing. I made a lot of upgrades at home and bought at the right time when the market was up.
Next: Contact your lender
Once you feel like you have 80% (or less) of the loan to the value of your home, you can contact your lender using the General Customer Service Line. Each lender has its own protocol for handling PMI removal requests. Some will ask you to pay for an assessment and then submit it to them for review, while others will review your payment history to make sure you qualify before requesting payment for an assessment.
In any case, the process is not free. You should be prepared to pay around $400-$550 for a bank-selected appraiser to come to your home, take photos and measurements, and review comparable properties in your area. The appraiser will then send your lender their final opinion on the value. If the value proves your LTV is 80% or less, they will remove the PMI.
Keep in mind that each lender has its own rules and requirements. Many will let you remove your PMI if your LTV is 80% or less, but some require it to be 78% or less. That’s why it’s so important to call customer service before you start the process to find out exactly what you’re aiming for.
…or wait for them to contact you
The Homeowner Protection Act states that mortgage lenders are required to cancel your private mortgage insurance after your loan has paid off up to 78% of the principal., provided that you make current payments. This does not apply to all FHA loans, but does apply to regular loans owned by Fannie and Freddie Mac. So if you are not in a hurry and prefer to wait for your lender to start the process, just keep paying and they will contact you when the time is right.
Summary
If you can’t save 20% for a new home, PMI is a necessary (and expensive) evil. The sooner you get rid of it, the more money you will have in your pocket to either pay off your mortgage faster or use it for other financial purposes.
Use a combination of the three methods above to reach the 20% mark as soon as possible.