If you bought a home in the last few years, there is good chance you could save some money, starting now. Buyers who purchased with less than 20% down are often paying private mortgage insurance or PMI. The amount of PMI paid monthly depends on the size of the loan, but can be anywhere from $50-300+ of your monthly note. And just in case you were wondering, no, PMI is not insurance for you. It’s insurance against you in case you default on your loan. Nice, right?
In all fairness, PMI allows borrowers to bring less money to closing. So if you don’t have the 20% chuck of change to get a conventional loan, PMI encourages banks to take the risk instead of just denying you loans. Additionally, the insurance drops off automatically, when your principle balance is at 78% of value. Wait, did I just say 78%? I thought the magic number was 80%?? It IS when you’re purchasing, but lenders are allowed to collect PMI until you contact them or until you reach that additional 2%. Whichever comes first. This matters because, depending on how much of your payment goes to principle, you could clock in 2-5 extra PMI payments. I bet you could find way better things to do with $1500.
What can you do???
1. Know your LTV. Loan-to-value ratio. In simple terms, this is loan principle you have remaining vs your original purchase price. For example:
You got a loan for $180,000, and your original sales price was $200,000. So the LTV is 90%.
As you make monthly mortgage payments, the principle goes down. So in our example, let’s say in 2 years, your principle is now $160,000. We use your original sales price of $200,000. Now your LTV is 80%. Tada!
What to do if this is your scenario: Contact the lender and ask for the PMI to be removed.
2. Know your appraised value. Appraised value is the amount that your home would sell for in today’s market. For example:
You got a loan for $180,000, and your original sales price was $200,000.
A year has passed and you still have principle of close to $180,000, but now the homes in your area seem to be selling for about 10% over last year. Now your home’s value is $225,000. In that case the LTV is 80%. Tada tada!
What to do if this is your scenario: Contact the lender and ask for a new appraisal to be done. Once complete, the PMI can be removed.
3. Know your options. If your lender doesn’t seem to want to to help with either of the above, you can refinance your home. In this scenario, you will pay closing costs again, but you will be done with PMI. It will be important for you to review the potential savings with the new lender, to make sure the cost is worth it. But if rates have shifted downward since you purchased, the additional savings or switch to a loan without PMI can make it worthwhile.
The good news is that home values are on the rise. So much so that if you purchased over 12 months ago, you could be in a good place to see about getting the PMI removed from your loan. It will take some persistence, but use the steps above to get you on your way. And as always, we are here to help with comparable analysis to see what you home is worth in today’s market.