How to Remove Private Mortgage Insurance (PMI) When Home Value Increases

Private Mortgage Insurance (PMI) can be a significant additional cost for homebuyers, particularly when the loan to value (LTV) ratio exceeds 80%. However, if your home value has increased, you may be eligible to remove this insurance. In this article, we will explore the steps you can take and the options available to you.

Understanding PMI and its Role

PMI stands for Private Mortgage Insurance. It is a policy that protects the lender in case a borrower defaults on their mortgage. Traditionally, PMI is required when a borrower makes a down payment of less than 20% of the home's purchase price. However, there are two types of PMI: one for conventional loans and another for FHA (Federal Housing Administration) loans.

While FHA loans require PMI for the life of the loan, conventional loans often allow PMI to be removed when certain conditions are met. If you have a conventional mortgage, you can request the lender to remove PMI when your loan-to-value ratio drops to 80% or below, typically when you have 20% equity in the property. This can significantly reduce your monthly mortgage costs.

Steps to Remove PMI

The process of removing PMI depends on a few factors, including the type of loan you have and the lender's requirements. Below are the general steps you can follow to remove PMI from your conventional mortgage.

1. Check Your Equity

The first step is to determine your equity in the home. You should have at least 20% equity before you can request to remove PMI. You can calculate your equity by subtracting the loan balance from the current market value of your home. If your home has doubled in value, you may have more equity than you initially anticipated.

2. Gather Documentation and Get an Appraisal

If you have sufficient equity, the next step is to send proof of your property's value and equity to your mortgagee. The mortgagee may request an appraisal to confirm your valuation. This process ensures that the lender is confident in the market value of your home and the current equity position. The appraisal fee typically ranges from $525 to $800, depending on the lender and the location.

3. Request to Remove PMI

Once you have the required documentation and appraised value, you can formally request to remove PMI from your conventional mortgage. Your lender will need to evaluate the information and may require additional verification. If all goes well, the lender will remove the PMI from your loan, and your monthly mortgage payments will be reduced.

Waiting for PMI to Drop Off Automatically

Another method to avoid paying PMI is to let it drop off automatically. This happens when the loan balance reaches 78% of the original purchase price. Here is a breakdown of the timeline for different loan amounts:

For a 90% loan, it would take about 6.5 years to reach 78% of the purchase price. For a 95% loan, it would take about 8 years to reach 78% of the purchase price.

However, the exact time can vary based on the interest rate and appreciation of the home's value. Additionally, if you have a lower initial down payment, it may take longer to reach the 80% LTV ratio. For example, if you initially put down 10% and the home appreciated by 5% annually, you would reach the 80% LTV in about 18 months. If your down payment was 5%, it would take about 30 months.

Options for Moving Forward

While you can wait for PMI to drop off automatically or request its removal, you may also consider refinancing your conventional loan. Refinancing can offer lower interest rates and help you eliminate PMI faster. Although there are refinancing fees to consider, the long-term savings on your monthly mortgage payments can be substantial. Typically, the cost to refinance is offset within two years through lower interest payments.

Automated Valuation Models (AVMs)

To get a rough idea of your home's value before incurring the higher cost of an appraisal, you can request an Automated Valuation Model (AVM) from your loan officer. An AVM is a computerized analysis that compares your property to similar homes in the area. While it's not a substitute for a full appraisal, it can give you a preliminary estimate and help you decide whether the additional cost is justified.

Conclusion

Removing PMI can be a straightforward process if you have the required equity and are willing to go through the necessary steps. By understanding the requirements and following the appropriate procedures, you can lower your monthly mortgage costs and save money over time. Whether it's waiting for PMI to drop off automatically or requesting its removal, the key is to stay informed and proactive about your mortgage situation.