Get Rid of PMI
Do you pay for private mortgage insurance? Well, if you put less than 20% down on your mortgage you probably do. It could range from 0.5% to 1% of the cost of your mortgage.
For example, we’re paying about $100 a month in PMI.
Basically, PMI acts as insurance for the bank against you, the homebuyer. Because you are putting less than 20% down on your mortgage, the bank sees you as a risk. It forces you to pay insurance against your loan until you reach 20% equity in your home. This, theoretically, protects the bank if you were to be foreclosed upon. To make it even more confusing, though, sometimes PMI is something that the homebuyer MUST pay for a set number of years. Often, 2, 3 or 5 year terms.
Now, this is not to say that you are stuck paying PMI for that entire 5 year term. There are a couple of ways to get rid of PMI on your house.
When your loan-to-value ratio of your house reaches 78% – PMI should be cancelled automatically by your mortgage holder. However, if you keep track of your equity in your home, you can request PMI to be dropped as soon as your equity reaches 80% of your loan. This may or may not happen before the 5 years is up, but you should definitely pay attention to your equity.
Especially, because you can reach 80% equity on your home in other ways!
- Do you pay extra on your mortgage? You could be paying down the principle of your mortgage faster than you think.
- If the area you live in is hot and home prices are rising, you may hit 80% equity just by virtue of the fact that you bought in a popular area. You will probably have to get your house appraised to show the gain in value.
- Lastly, if you’ve made significant renovations to your home (new siding, roof, windows, pool, etc…) you could also reach 80% equity in your home by boosting the homes value through the upgrades you’ve done.
Now, I should clarify that if you have an FHA loan, PMI does not quite work the same way. You have to refinance your home (if you bought after June 3, 2013) in order to have the PMI removed from your FHA loan or you’ll have to wait 11 years (again, if you bought before June 3, 2013). There are different rules for FHA loans before June 3, 2013. Here’s a good breakdown of how it works.
For us, I simply went to the website of the bank that holds are loan and typed “PMI” into the search bar. I was given a handy little checklist of things to do if I wanted to request removal of PMI. This involved writing a hand-written note and mailing it to them. I included any upgrades we made to our home (we recently put on a brand-new roof and re-sided the entire house) and mailed it off.
A few weeks later we got a letter noting that we were still only at 83.5% equity but that if wanted to hire an appraiser to reappraise our home it would cost $425. The appraiser’s determination of our home value would tell us whether or not we could get rid of our PMI. We’re still waiting for the results of that appraisal, but fingers crossed we can get rid of our PMI soon! That extra $100 a month would really help pad our Roth IRAs.
Now, if you think that any of the above applies to you and that you have 80% or more equity in your home, you should definitely call your bank and chat with them!
Remember, the bank is under no obligation to cancel your PMI until you hit 78% on your original loan value. So you could save yourself hundreds or thousands of dollars in PMI if you investigate your home’s equity and simply make a couple phone calls to the bank!