Can I Wave Goodbye to PMI Early?
If you recently purchased your home with less than a 20% down payment, it is fairly certain that part of your monthly payment includes private mortgage insurance (PMI). Private lenders (i.e. not FHA or VA) add PMI to your monthly payment to protect themselves against the risk that you will be unable to pay and could default on the mortgage. PMI is calculated based on how much your down payment is, in relation to the price of the home, and your credit score.
The good news is that PMI does not last forever. Once your loan-to-value (LTV) ratio hits 80%, PMI is no longer necessary. Typically, this will be several years into the mortgage. This will be clear to you when you receive the mortgage amortization table, which will show the exact month and year that this will happen. At that 80% point, you can request for PMI to be removed. By law, the lender must remove PMI automatically when you reach 78% LTV.
But do you have to wait even that long?
Consider how LTV is calculated. If your home cost $250,000, and you put $25,000 down, your mortgage would be $225,000. At the time of the purchase, the home’s value is obviously the purchase price. In this case, the LTV ratio equals 90% ($225,000/$250,000).
But what if in a hot real estate market, your home is worth quite a bit more just a year later? While your outstanding mortgage may only have fallen a bit over the course of the year (because most of your payment is going to interest), you may still have reached that 80% LTV milestone based on the increased value of the house. In our example, the outstanding mortgage after one year may be $220,000 but if the home has jumped in value to $275,000, now you are at 80% LTV and can request that the PMI be removed.
Requesting the removal of PMI is usually quite straightforward. Your lender may require a home appraisal to confirm the new value, or they may be content to rely on their own market survey. Of course, if you have made substantial upgrades to the home, this could also result in a higher valuation. If an appraisal is necessary, this will be a cost to you which you will have to weigh against the potential savings of removing PMI. Depending on how much longer the PMI is scheduled to last, this may be well worth the small investment.
Understandably, the value of your home is a metric that you may not pay much attention to unless you are looking to move. But this is an example of how a little knowledge may save you quite a bit of money!