If you purchased your home in the last couple of years using a conventional loan with a down payment of less than 20%, you are probably paying PMI along with your mortgage every single month. Your PMI can, generally, be removed in one of three ways. Assuming you have a good payment history and are current on your payments, you can remove your PMI by:
Waiting for PMI to be terminated automatically. While this sounds nice and easy, this is the option that leaves you paying for PMI the longest. Your PMI will automatically terminate when the principal balance of your loan reaches 78% of the home’s value. This is also known as loan-to-value ratio (“LTV”). The value of your home used when determining LTV is calculated by using the lesser of the contract sales price, or the appraised value at the time the loan is issued (“Original Value”). On a 30-year fixed loan, this point usually occurs about 9 years into the loan. If you have made additional payments towards your mortgage, and more specifically towards the principal balance of your loan, you may reach this point even earlier. If a LTV ratio of 78% is not reached by the midpoint of the loan’s amortization period, the servicer must terminate your PMI after this midpoint is reached (“Final Termination”). On a 30-year loan, this point occurs 15 years into the loan; on a 15 year loan, this point occurs 7.5 years into the loan.
Requesting cancellation of your PMI. You can request cancellation of PMI when the principal balance of your loan reaches 80% of the home’s appraised value or, stated differently, when you reach 20% equity in the home. Based solely on mortgage payments made according to the initial payment schedule provided by your lender, this usually occurs about a year before your PMI automatically terminates. Again, if you have made additional payments towards your mortgage, and more specifically towards the principal balance of your loan, you may reach this point even earlier.
Getting your home appraised. Many lenders also allow you to request cancellation of PMI if your home’s value increases enough to help you reach the 20% equity threshold. A new appraisal or Broker’s Price Opinion (BPO) will likely be required to substantiate the increase in your home’s value and the borrower is typically responsible for the cost of these reports. The new appraised value of the home (“Current Value”) replaces the Original Value when calculating LTV and can go a long way towards helping you remove your PMI more quickly. For insight into how much home values have increased in your area, we recommend reaching out to your agent and/or a qualified professional who specializes in your neighborhood. Please note, not all lenders allow for a new appraisal, and may instead require you to refinance your loan in order for the new appraised value to be considered. Additionally, if there are lender specific requirements that apply to your circumstances, these should be discussed with your lender. By way of example, some lenders have seasoning requirements which prohibit them from approving requests to cancel PMI and/or refinancing a loan until a specific period of time has passed since the loan was first issued.
To illustrate the differences between the three options outlined above, let’s say that you purchase a home for $600,000 and it appraises at $600,000. You make a down payment of 5% and secure a 30-year fixed, conventional loan for $570,000.
Your PMI automatically terminates when the remaining principal balance of your loan reaches $468,000 or less. In other words, after you’ve paid off $102,000 of your loan or more.
You can request cancellation of your PMI when the remaining principal balance of your loan reaches $480,000 or less. In other words, after you’ve paid off $90,000 of your loan or more.
You can order a new appraisal which, if it shows a $50,000 increase in the value of your property, can be used to request cancellation of your PMI when the remaining principal balance of your loan reaches $520,000 or less. In other words, after you’ve paid off $50,000 of your loan or more.
You can see how increases in home value can help you reach the 20% equity threshold required to request cancellation of your PMI more quickly. So what are you waiting for – call your lender and/or your real estate agent today to start saving money in 2023!
Please note, the conditions for canceling or removing PMI may vary depending on your loan type and lender. By way of example, if you have an FHA, VA, or high risk loan, the information contained in this article may not apply. For more information on PMI and the rights of homeowners under the Homeowners Protection Act, also known as the PMI Cancellation Act, we recommend reviewing this article by the Consumer Financial Protection Bureau (here).