Ugh, PMI.
It just sticks around forever, and getting rid of PMI?
In case you haven’t heard, PMI is the pits…
Not familiar with it?
PMI stands for Private Mortgage Insurance, and it’s the insurance premiums you pay with your mortgage as a result of putting less than 20% down when you bought your home. You may even have put as little as 3.5% down through an FHA mortgage, resulting in hundreds of dollars added to your mortgage payment each month.
{Related: How To Buy a House At 22}
Like I said, it’s the pits….
PMI stinks, mostly because there are easy ways to get rid of it – and who couldn’t use a few hundred extra dollars each month?!?
Today, if you’re paying PMI, pay attention, because I’m breaking down how to get rid of those pesky premiums once-and-for-all.
Understand LTV to get rid of PMI
Before we get started, there’s a term you need to know: It’s LTV, which stands for Loan-To-Value Ratio.
I’m going to use this term quite a bit in this article, because it’s one of the deciding factors that the bank uses to decide whether or not to let you stop making PMI payments.
Your bank will need an LTV of 80% or less in order to drop your PMI (in most cases…sometimes it’s not that simple) so here’s an example:
Say you purchased your home for $200,000 in the year 2010. You put down the minimum down payment at closing of 3.5%, or $7,000. Before closing, the bank did an appraisal on the house, and it appraised at $205,000.
This means that going into the purchase you will owe $193,000.
The, you made payments on that home for 6 years, all together paying down $21,000 of the mortgage principle (I’m excluding interest, and rounding numbers very heavily for simplicity)
So, you now owe $172,000 on your home.
In this case, your LTV would be $172,00/$205,000 (amount owed divided by appraised value), or:
83.9%
*This assumes some pretty simple loan payment numbers, and that your property appraisal remains steady over 6 years. This would almost never be the case, but it’s a good example of how to calculate LTV, as well as how the bank does.
Now that we’ve had a math lesson, you ready to actually get rid of that PMI?
If Home Values Have Risen
Hopefully when you bought your house (we bought our first one when we were 22!) you worked with a knowledgeable realtor to find a home in a growing area that would gain value as the years past. Then, my hope is that your realtor helped you to negotiate a decent deal on the purchase price of that house.
If you’ve been paying on the home for just a few years, there is a very good chance that the combination of your payments + appreciating home value have left you with an LTV of 80% of less.
If this is the case, first check with your bank to find out exactly what documentation they need to drop PMI. In most cases, all they’ll need an official appraisal, and will be able to drop it in less than 60 days.
But in some cases, it’s not that simple, like in Matt & I’s case:
We were 90% sure our LTV was way less than 80%, so we called our mortgage holder to find out what they needed to drop the PMI before shelling out for an appraisal. As it turned out, there was fine print in our mortgage that required us to pay PMI for 5 years – regardless of the LTV.
Pretty screwed up.
So let this be a lesson: always call your bank first, before shelling out money for anything.
And if you do find there is awful fine print, don’t worry, because I’ve got ways around that too. Just keep reading.
{Related: How to Save $75,000 Just by Sealing Your House}
If You’re a Super Saver
If this is you, first let me say “yay” because you’re awesome!
You’ve got money in the bank, a heavily padded emergency fund, and retirement accounts that are well on their way to being ready when they’re needed. You’re awesome, and so you could use a portion of the cash you’ve saved to pay down enough principal on your mortgage to get your PMI dropped.
Just be sure to call your bank clarify before you pull money out of your savings (RE: Matt & I’s story above), and never ever pull money out of a 401(k) or other retirement vehicle that will incur penalties. It’s just not worth it.
If You Live for DIY
Some of us (ok, fine. ME) are obsessed with HGTV-esque projects, and have, over the years done a lot of improvements to your house that may have added enough value that your LTV is less than 80%. Chances are, if you have several years of projects under your belt – especially those that involve the bathrooms or kitchen, you’ve probably added value to your home!
If you’re pretty sure you will be at 80% LTV or less, call your bank and find out the process for getting an official appraisal for the purpose of ridding yourselves of that pesky PMI!
{Related: 4 Reasons Not to Buy a House}
If You Scored a Bargain
I really hope you were as savvy shopping for a home as you are shopping for groceries, clothes, and feeding your online shopping habit (no shame!). There ARE good deals to be had on real estate – especially if you’re willing to invest elbow grease as well as your hard-earned cash, and if you made a smart real estate buy, there’s a very good chance that some cleanup, general maintenance, and a thorough coat of paint have already put you in the sweet spot.
That is, 80% or less LTV!
It’s worth having an appraisal done if you’ve put in the work and your purchased your home well below market value. The $400 (estimated) an appraisal will cost you could save you hundreds or even thousands in PMI.
For Matt and I, this was our story. We purchased our home for $46,000, in a neighborhood where houses were going for well above $100,000. Lots of cleaning, a kitchen renovation, and lots of paint later, we had a home that appraised for $87,000 – just a year after we bought it!
{Related: How Much Money Do You Need To Save For A House}
If You’ve Been Paying for Years
Maybe you’ve been in your home for more than 5 years. The real estate in the city you bought in is doing well, and you’ve paid on time, every time. If this is you, even if you’ve done nothing else beyond general maintenance you still have a pretty good change of being below 80% LTV.
But even better, most loans only require you to pay PMI for 5 years – which means that after that you don’t have to pay!
However, many banks won’t remove the premiums automatically. Instead, they will keep charging you until you call and ask for them to be removed. Pretty shady, huh?
If Your Bank Won’t Budge…
Unfortunately, sometimes even with an 80% LTV – for whatever reason – your bank won’t budge. They’ll require you to pay PMI For 5 years, regardless of the value added to the house. This was my husband and I’s story.
But rather than refusing to feel stuck, we found out that we had options.
Specifically, we had the option to leave that bank.
We ultimately chose to take our business to our local credit union, in the form of a mortgage refinance. Not only did we score a rate that was 0.25% lower, we completely got rid of our PMI, took our term from 30 to 15 years, and gained great customer service!
So, if you’ve exhausted all your options, maybe you actually haven’t. Before you give up, make sure you’ve explored every single thing available to you – you might be surprised!
PMI is a pest.
A pest that can cost you hundreds or thousands of dollars each year.
While it might seem impossible to rid yourself of PMI – and gain back all that cash – you actually have tons of options – so don’t give up!
Gretchen Lindow
This post may contain affiliate links. See my disclosures for more information.
Opha says
Thanks for sharing!