PMI or Private Mortgage insurance
Private mortgage insurance provides protection to a lender in case you default on your home loan. Unless you make a 20% down payment on a house, you’ll most likely be required to purchase PMI. PMI premiums on a median priced home ($300,000 in 2020) can run between $175 and $300 per month, according to the Mortgage Insurance Companies of America.
PMI might be unavoidable, but it isn’t eternal. Knowing exactly when you’re entitled to cancel coverage can save you a bundle. If you own a median priced home, you’ll pocket between $2100 and $3600 for each year’s worth of premiums you can avoid. That extra cash can be used to pay down your principal instead.
When PMI Is Cancelled Automatically
Once you have paid down or your home has increased in equity by 22%, you can refinance out of your PMI or petition the lender to have it removed (conventional loans only). Your lender may require a Broker Price Opinion (BPO) and charge you $100 for this. They might want an appraisal that will cost you about $500. It’s worth it! Look at your statement. If you are paying $50 a month for PMI… you’ll pay yourself back in 2 months.
To calculate your LTV (Loan to Value), divide the outstanding loan amount by the original price of your home. If you have a $190,000 mortgage on a house you purchased for $200,000, the LTV is 95%. You’d need to get the mortgage balance down to $156,000—78% of the original value—to qualify for automatic cancellation of PMI.
When You Need to Request Cancellation
You don’t necessarily have to wait for automatic cancellation. When your LTV hits 80%, you can petition your lender to end its PMI requirement. The process can take several weeks. Your lender isn’t obligated to grant your request, but you’ll bolster your case if you have a good payment history.
Start by calling your lender, not the PMI provider. You’ll probably need to make a formal request in writing and pay out of pocket for an appraisal. The average cost of an appraisal is $800 depending on your area and available comps. Your lender will usually select the appraiser.
Although an appraisal is conducted primarily for the benefit of the lender to confirm that your property hasn’t declined from its original value, a high appraisal can work to your advantage. As your property value increases, whether due to a general uptick in real estate prices or specific home improvements, your LTV decreases.
A Way Around PMI Premiums
In search of a PMI loophole? Look for so-called piggyback loans, also known as 80/10/10 or 80/15/5 loans. Basically, the home lender finances 80% and immediately gives you a second loan for 10% to 15%. You put down 5% to 10%. No PMI is required.
This alternative has traditionally been available for home buyers with minimal capital but excellent credit. In tight lending environments, however, this arrangement is harder to come by. And even when piggyback loans are available, the extra interest you usually pay on the second mortgage may actually cost more than PMI premiums. Do the math.
If you would like professional local help on removing your PMI or refinance out of your PMI
Fairway Independent Mortgage
Serving: Lewis, Thurston, Pierce, etc
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.
Article written by
is a freelance writer. He’s been editor of many financial magazines and is the author of “Run It Like a Business,” a practice management book for financial planners. He and his wife own a pre-Civil War house in New York.
Another great article I recently found on FHA- PMI Click here