How Can I Eliminate PMI?
If you purchase a home with a conventional loan for less than 20% with the down payment, you can expect to pay private mortgage insurance (PMI). Private mortgage insurance protects the lender if you were to default on your loan. You pay a monthly premium to the insurer who will pay a portion of the balance to the lender in the event of a default.
Private mortgage insurance is relatively expensive and ultimately goes towards a benefit that you will never see. For that reason, most buyers are eager to eliminate PMI as soon as possible.
How to Remove PMI
Generally speaking, PMI is removed when the loan-to-value (LTV) ratio drops below 20%. You may formally request PMI removal via written communication when the loan has dropped to 80% of the original principle. The mortgage lender is required to remove PMI at a 78% LTV ratio.
With that said, there are some ways to cancel your PMI sooner. You can negotiate from a stronger position using the tactics below.
- Obtain a new appraisal. Talk specifically to your lender about their policy, but many lenders will consider a new appraisal over the original purchase price of the home. If your home has appreciated in value, then this appraisal may be considered towards reaching the 80% or better LTV ratio. Remember to weigh the cost of the appraisal, which ranges from $300-$500, with the costs of paying your PMI. Often, and with confirmation from your mortgage lender, the appraisal can be much cheaper than several more years of paying PMI.
- Prepay your mortgage. Check with your lender to confirm any prepayment penalties for your mortgage, but most lenders allow prepayment. This is essentially a strategy to more quickly reduce your LTV ratio by paying down the principle and saving the interest that would have otherwise been generated.
- Remodel your home. The LTV ratio depends upon the value(V) of your home. If you strategically increase that value by remodeling your home, then that can often be enough to tip the LTV ratio in your favor. Ask the lender about this prior to performing a remodel, but don’t forget to request a recalculation of the LTV one the remodel is finished.
- Refinance your home. The LTV can be influenced by simply refinancing your home which will reflect current market conditions. These conditions may be favorable if real estate in your area is now considered more valuable than when you initially purchased your home. Often, the refinance will trigger a new home appraisal, which could be rolled into the financing as well.
How to Calculate the LTV Ratio
Calculating the LTV ratio is not difficult. It is a function of the original loan balance owed divided by the original loan amount. Let’s say that John Doe now owes $100,000 on his original loan of $125,000.
In John Doe’s calculation, the LTV ratio is $100,000 / $125,000 or 80%.
In this case, it is time for John Doe to request cancellation of his PMI.
Know Your PMI Rights
All mortgage servicers must provide an annual statement that shows whom to call to obtain information about cancelling PMI. In addition, by law, your lender must inform you at closing as to how many years and months it will take to pay down your mortgage enough to remove PMI.
Last but not least, other factors help influence your ability to remove PMI. First and perhaps foremost, your loan payments need to be current. Not paying your mortgage on time or falling behind in payments simply illustrates the potential for a great occurrence of default and the lender will generally be less likely to work with you.
As previously mentioned, your request must be in writing. You may have to prove that there are no other liens on the home such as a home equity line of credit or a home equity loan.
Remain persistent in your endeavor to remove PMI. If you are interested in refinancing your home with a mortgage broker who provides exceptional speed, service, and selection of mortgage products, speak with Range Lending today!