Canceling PMI can save you thousands. If you own a home and you put less than 20% down, it’s likely you have Private Mortgage Insurance, or PMI. This is insurance that you, the borrower, pays to protect your lender if you default on your mortgage.
Depending on how you look at it, PMI is a little insulting. The lender seems to be saying that they don’t trust you to pay them back so you need to pay extra. The amount you pay for mortgage insurance can vary depending on the amount you put down, but let’s assume the following scenario.
You find a home for $277,777 and put 10% down. Your loan amount is $250,000. The mortgage insurer charges 0.49% of the mortgage amount for a total annual premium of $1,225. This amount is divided by 12 which comes to $102.08 and is added to your monthly payment. This amount does NOT go toward principal reduction. It simply vanishes into thin air and could otherwise be used for debt reduction or savings and investment.
The good news is that this PMI payment won’t be around forever. According to the Consumer Financial Protection Bureau (CFPB), borrowers can request removal of PMI when their loan balance reaches 80% of the value of the home at the time of purchase. Furthermore, lenders are required to automatically drop PMI when the loan balance reaches 78% of the original home value.
Mortgage Insurance: Canceling PMI Can Save You Thousands
Let’s take the example above and assume a 30 year fixed rate mortgage at 4.5% with no additional payments toward principal:
- Borrower takes the initiative and requests cancelation at 80% loan-to-value (LTV): The borrower would have paid $7,350 in PMI over 6 years.
- Borrower waits for automatic removal at 78% LTV: The borrower would have paid $8,779 in PMI over 7 years and 2 months.
However, what the CFPB website doesn’t mention is that lenders may be willing to cancel PMI even earlier under certain situations. One lender I contacted has the following policy for canceling PMI:
- The loan must have a minimum two year payment history with no late payments.
- The borrower pays for a new appraisal.
- The loan balance to current value based on the new appraisal must be at least 75% LTV.
Why is this important? If you have purchased within the last two to four years, it is likely that values in your neighborhood have risen. If so, you may be eligible to have PMI removed from your loan much earlier and put that money back into your pocket.
According to Zillow, a real estate website, the median home price in Sacramento has risen from $213,000 in January of 2013 to $292,000 in March of 2017. That is a 37% increase. Granted, not all areas have experienced the same price increases and real estate markets vary widely across the country.
However, consider our example above. If you bought a house for $277,777 two years ago and your loan amount was $250,000, your current loan balance would be about $239,000 due to monthly payments toward principal. For the borrower to be at 75% LTV, the new appraised value must come in at $318,000 which is a 14.7% increase.
Canceling your PMI at year two of your mortgage under this scenario could save you between $4,900 and $6,300 for the price of a $500 appraisal. That may not seem like much when we’re talking about loan balances in excess of $250,000, but consider the future values if invested for 20 years:
Be proactive. If you’ve purchased a home within the past two to four years and are paying PMI, contact your lender. Get familiar with their policy on canceling PMI and take the steps to determine if you’re eligible. Doing so could put thousands of dollars right back into your pocket.