There are many ways to remove PMI and there are several requirements that must be met. This is not a black and white process. It is important to reach out to my preferred lenders so they can discuss the best method of PMI removal. You’ll also want to ask me for a market analysis to see if your property has appreciated.
PMI is removed when you have 20% equity in the home through at least one of the following processes:
Market Appreciation
Paying Your Mortgage
Refinance
Prepay Your Loan
Remodel to Add Value
Terms to know:
PMI– If you bought a home with a down payment less than 20%, you were most likely required to pay PMI- private mortgage insurance (unless you did an 80/10/10 loan). The less cash you put down on the home the riskier the loan is for the bank. Therefore, they tack on a monthly insurance payment until you have at least 20-22% equity in the home.
LTV– loan to value ratio. Formula: Current loan balance / original appraised value
Current Loan Balance– what you owe on your home
Appraised Value– The evaluation of the property’s value. The original appraisal is the value of the home when you bought it. You can ask your lender or Realtor for that document if you don’t have it saved. Most likely it the same as your purchase price. To remove PMI you may need a new appraisal that will show the current value of your home- which could be more or less than the original appraised value.
Refinance– the process of swapping out loans. (1) You apply for a new loan, (2) the new loan pays off the existing loan on the home and (3) you now have a new loan to pay off. People refinance to lower their interest rate, remove PMI, shorten loan term and change loan type, to name a few reasons.
Loan Servicer vs Lender– the loan servicer is the institution that you pay your mortgage to. Your lender is the person you used to buy the home. It’s best to talk to your lender to discuss PMI removal options before talking to the loan servicer. The loan servicer most likely won’t know the best method for PMI removal for you.
How to remove PMI
Example #1:
Chloe bought a home for $400,000. She has $320,000 left on her mortgage (the amount she still owes the bank till the home is owned outright).
LTV Formula: Current loan balance / original appraised value
$320,000 / $400,000 = 0.80
When my loan amount is $320,000 I can petition to my loan servicer to remove the PMI because my LTV is 80%.
Example #2
Chloe bought a home for $400,000. She has $310,000 left on her mortgage (the amount she still owes the bank till the home is owned outright).
LTV Formula: Current loan balance / original appraised value
$310,000 / $400,000 = 0.775
When my loan amount is $310,000, the PMI should fall off because my LTV is less than 78%.
Understanding the difference from example #1 and #2:
Basically, when the loan to value ratio (LTV) is 78%, cancellation is required. But the law also states that the homeowner can petition to cancel PMI when the LTV is 80%. If you use the original appraised value from when you bought the home then it could take 7-10 years before you have 78-80% LTV or in other words, 20-22% equity in the home.
*By law, your lender must tell you at closing how many years and months it will take you to pay down your loan sufficiently to cancel mortgage insurance. Mortgage servicers must give borrowers an annual statement that shows whom to call for information about canceling mortgage insurance.
Most likely you want to remove your PMI as soon as possible. Here is an example of how to do that.
Example #3
Chloe bought a home 3 years ago for $400,000. She put 5% down which is $20,000. Her LTV is 95% and her loan amount is $380,000. She ordered a new appraisal which showed a value of $470,000. Her home appreciated 18% in the last 3 years. She also made 36 mortgage payments which decreased her original loan amount of $380,000 to $350,000.
LTV Formula= Current loan balance / new appraised value
$350,000 / $470,000 = .74
In two years, Chloe was able to remove her PMI due to appreciation in the market and paying mortgage the last 3 years.
Example #4
Chloe bought a home 18 months ago for $400,000. She put 10% down. After her mortgage payments she has a loan amount of $340,000. Her home appreciated 15% in 18 months and her new LTV is 74%.
Understanding the difference in Example #3 and #4:
In both examples the LTV is 74%. Unless you have improved the property, meaning added value through upgrades or sqft, the loan needs to be at least 2 years old- 24 PMI payments- to remove PMI. If the loan is between 2-5 years old the LTV has to be at least 75%. If the loan is older than 5 years then the LTV is 80%. In example #4, the loan is less than 2 years old. In this case, you will need to refinance. You’ll need to ask for a PMI-canceling refi, but you’re not guaranteed to get approval. Refinancing requires you to go through the entire loan process. It’s like buying your house all over again. You’ll want to ask yourself:
- Can I recoup the costs of refinancing?
- Besides removing PMI, what other benefits does refinancing do for me: Can I reduce my interest rate, loan term and/or taxes during the refinance?
- Will I own this home for at least another 3-5 years to make the refinance worth it.
Other notable requirements:
- The ability to remove PMI applies only to conventional financing. Therefore, if you bought a home with a government loan such as FHA or VA, then you cannot remove PMI unless you refinance into a conventional mortgage. That loan cannot exceed 80% of the value of the property.
- A cancellation requires a good payment history which means no 30-day late payments in the last year and no 60-day late payments in the past 2 years.
- You must request PMI cancellation in writing.
- You might have to prove that you don’t have any additional liens on the home.
- You most likely have to get an appraisal to demonstrate that your loan balance isn’t more than 80 percent of the home’s current value. Your loan servicer will order the appraisal at your expense. The appraisal is around $450-500.
Where to find your loan balance and appraised value:
The bank you pay your mortgage to will know your loan amount- if you pay electronically then you can go the website, login and look it up in your portal. You should have a copy of your original appraisal from when the lender emailed it to you before you closed on your home. If you don’t have a copy you can email your lender and request it.
Have a question? Email me!
