For many homebuyers, coming up with a 20% down payment can be a challenge. Enter private mortgage insurance. Private mortgage insurance (PMI) allows prospective homebuyers the opportunity to secure a conventional loan when they can’t afford to put 20% down. However, since it is designed to protect lenders, it does come with higher monthly payments (approximately 0.3% to 1.5% of the amount of your mortgage). For example, on a $400,000 loan with PMI at 1%, you’ll be paying $4,000 per year, or $400 per month.
Thankfully, you don’t pay for PMI forever. Once your loan principal reaches 78% of the home’s original value, or when you’ve completed 15 years’ worth of payments on a 30-year mortgage, your PMI should be canceled automatically. But what if you don’t want to wait until then to lower your payments? There is a way to make it happen sooner for little money out of your pocket now, and it all comes down to your current home value.
If you believe that your home value has increased enough that your LTV (loan-to-value ratio) is 80%, you may qualify to have your PMI removed early, effectively lowering your monthly payment and saving thousands of dollars over the life of your loan.
Reach out to your REALTOR® for current value.
The first step is to check with your REALTOR® regarding your current home value. He or she can review recent comps and advise you as to whether or not you meet 80% of your LTV ratio.
Request PMI removal application.
Next, you’ll want to reach out to your mortgage company to request PMI removal. They will send you an application to begin the process. Note that if the request is based on a current valuation, there is a seasoning requirement, which is as follows:
· 75% or less, if the seasoning of the mortgage loan is between two and five years.
· 80% or less, if the seasoning of the mortgage loan is greater than five years.
Make a list of improvements while you wait.
While you wait for the PMI removal application to come in the mail, compile a list of home improvements. Be as detailed as possible as you describe when the work was completed as well as the cost of improvements.
Prepare to pay for an appraisal.
Once you apply, your mortgage company will provide you with appraisal options. Be prepared to spend $150-650 for an appraisal to make sure you meet the necessary LTV ratio requirement. For example, if you owe $365,000, your home will need to appraise for $456,250.
If you believe that the value of your home has increased due to the current real estate market or you’ve invested money in a home renovation, it’s worth checking with your REALTOR® to explore your options. For a little work and the cost of an appraisal, you could save a substantial amount of money over the life of your loan. For questions about removing PMI based on increased home value, please feel free to reach out! We’re here for you and #readytoserve!