If you have owned your home since 2020 there is a great chance your home has appreciated enough in value to get your monthly PMI payment removed. This will easily save you 2-5k/year.
Getting rid of Private Mortgage Insurance (PMI) can be a financial game-changer for many homeowners. PMI is insurance that lenders require from most homebuyers who obtain loans with less than a 20% down payment. The PMI protects the lender if the borrower defaults on the loan. However, once your Loan-to-Value (LTV) ratio drops below 80%, you might be able to remove PMI. Here's a guide to help you navigate this process.
Understanding LTV and Home Appreciation
Your LTV ratio is calculated by dividing your mortgage balance by your home's value. When you first buy your home, that value is determined by the sales price. However, over time, its value may rise due to market conditions, home improvements, or both. Home appreciation can significantly change your LTV. Meanwhile the loan amount is going down as you pay principal towards your loan. Appreciation and loan paydown often make you eligible to remove PMI earlier than anticipated.
Step 1 Get an idea of the value of your home (ballpark).
There are lots of ways to get an idea of what your home is worth.
- Ask your real estate agent to run comps for you and give you an estimate of the value of your home.
- Look at comps sold in your neighborhood.
Step 2: Contact Your Lender
If you think your home meets the 80% LTV, the first step to getting PMI removed is to contact your loan servicing company (the one you are making payments to). Let them know that you believe your home's value has increased enough that your loan balance is below 80% LTV. Your loan servicer should be able to provide you with the specific steps you need to take to get PMI removed.
Step 3: Get an Appraisal or a BPO
Lenders will usually require a professional appraisal or a Broker's Priced Opinion (BPO) to determine the value of your home. BPO will typically cost about $100-200. An appraisal will generally cost you between $500 and $800. The lender will determine if you are allowed to go with the cheaper BPO option. Which is basically paying a realtor somewhere to look at sold comps and say what they believe your house is worth.
Step 4: Calculate Your LTV Ratio
After you have the appraised value, divide your current mortgage balance by the appraised value to calculate your new LTV ratio. If it's below 80%, you're on the right track. Example: Appraised Value is 100k. Loan Balance is 70k. LTV = 70/100 = 0.7 or 70%.
Step 5: Follow Up
Don't assume that your PMI will be automatically removed after you've submitted your request. Keep a close eye on your mortgage statements to ensure that the PMI has been eliminated and confirm this with your loan servicer. If there are any delays, be proactive in resolving them.
Step 6: Reconfigure Your Budget
After successfully removing PMI, you'll have extra money in your monthly budget. You might consider building an emergency fund or investing the extra money.
Final Thoughts
Removing PMI is a step towards financial freedom. An increase in your home's value could be your ticket to lower monthly payments and greater financial flexibility. Take advantage of it as soon as you can!
