You May Be Able to Remove PMI Sooner Than You Think
If you paid less than 20% down when you purchased your last home, you’re probably paying a PMI premium. With the strong increase in home values since 2019, there’s a good chance that you can remove PMI since it may not be necessary any longer.
In this post, I thought I would explain what PMI is and why you even have it. In addition, there are some differences between PMI for a conventional loan and an FHA loan.
There are some specific rules that must be met if you have PMI before it can be removed. Also. If an AVM (Automated Valuation Model) was used by the bank to determine your eligibility for PMI removal, it may not have worked in your favor.
By getting your home appraised, you will be able to make an informed decision that could potentially save you money. I’ll lay out the steps you can take to get the process of removing your PMI started.
What is PMI?
PMI stands for Private Mortgage Insurance. It is a type of insurance required by lenders when you buy a home with conventional financing and put down less than 20%.
Mortgage insurance is also required on FHA loans; however, it is known as MIP or Mortgage Insurance Premium and is required on all FHA loans, not just ones with less than a 20% down payment. It stays with the mortgage for the life of the loan or until it can be refinanced into a conventional loan.
The whole reason for PMI is to protect the lender from losses since you put less than 20% down on a conventional loan. This makes it possible to get a mortgage for as little as 3% to 5% down payment.
If you’ve reached the 20% threshold by either paying down the loan or your property appreciating in value since you bought it, you may be able to drop the insurance and stop paying the money for no reason. If you’ve got an FHA loan, you can refinance it into a conventional loan and possibly forgo the insurance and add more money into your pockets each month.
I covered the basics of PMI removal back in 2015, but a lot has changed since then, so I thought I would update you on what’s going on now.
FHA vs. Conventional: What’s the Difference
Most of this article focuses on removing PMI from a conventional loan. If you have an FHA loan, the rules are different.
FHA loans use Mortgage Insurance Premiums (MIP) instead of PMI. While they are similar, they are not removed the same way.
For FHA loans made on or after June 3, 2013, the length of time you must pay MIP depends on your original down payment:
- If your down payment was less than 10%, MIP is typically required for the life of the loan.
- If your down payment was 10% or more, MIP is usually required for 11 years.
So why does this matter?
With a conventional loan, homeowners can often remove PMI once they have built enough equity. In some cases, that may involve obtaining an appraisal to show the lender that the home’s value has increased.
FHA loans generally don’t work that way.
Even if your home has increased in value and you now have more than 20% equity, FHA mortgage insurance usually cannot be removed just because your equity has grown. That’s one of the biggest differences between FHA and conventional loans.
If you have a conventional loan, rising home values may help you remove PMI sooner. If you have an FHA loan, rising home values alone typically will not remove your mortgage insurance.
That doesn’t mean you don’t have options. Homeowners who have built enough equity can choose to refinance into a conventional loan. If you qualify for a conventional refinance and have at least 20% equity in your home, the new loan usually will not require PMI.
The important thing to know is that every loan situation is different. Before making any decisions, it’s a good idea to talk with your lender or mortgage company about the options available to you.
If you’re not sure whether you have an FHA loan or a conventional loan, you can always call your mortgage servicer and ask them. Once you know which type of loan you have, you’ll have a much better idea of what steps may be available for getting rid of mortgage insurance.
Why Now May Be a Good Time to Look at Your Situation
In addition to normal appreciation, home values experienced an extra boost in value due to the COVID era. With a limited housing inventory and lower than typical interest rates, home values appreciated considerably, and some markets have continued to rise.
If you bought a house between 2019 and 2022, and put less than 20% down, you may now have 20% or more equity and could possibly drop the PMI premium. The combination of paying your loan down and the market appreciating has helped contribute to this.
Seasoning Rules and What You Should Know
Something most people don’t realize is that PMI removal is not based solely on your home’s current value. Most lenders also have seasoning requirements, which means you must own the home for a certain period before they will consider removing PMI based on appreciation.
If you have owned your home for less than two years, most lenders will not allow PMI removal based on market appreciation alone. Even if home values in your area have increased significantly, you may still have to wait.
Once you have owned the home for at least two years but less than five years, many lenders require your loan-to-value ratio (LTV) to be 75% or lower before they will remove PMI based on appreciation.
After five years of ownership, the requirement is usually less strict. In many cases, PMI can be removed once your LTV reaches 80%.
There is also an automatic cancellation rule that can be a little confusing. Under the Homeowners Protection Act, lenders must automatically terminate PMI when your loan balance reaches 78% of the original purchase price. Notice that this is based on the original value when you bought the home, not its current market value.
The problem is that automatic cancellation can take years longer than necessary. If your home has appreciated in value, you may already qualify for PMI removal long before your lender is required to cancel it automatically.
The bottom line: don’t assume you have to wait. If home values in your area have increased, it may be worth contacting your lender and requesting a PMI review. A current appraisal could help you get rid of PMI sooner and start saving you money each month.
How AVM’s Factor Into PMI Removal
An AVM or Automated Valuation Model is a method for estimating the value of your home. The best example I can give is the Zillow Zestimate. We’ve all heard of the Zestimate and how inaccurate it can be.
AVM’s are sometimes used by banks to estimate the value of your home. If you contact your lender about getting your PMI removed, they may check the AVM to see if you meet the percentage guidelines.
While the AVM may be able to give your lender a quick answer, it may not always be accurate. The AVM obviously does not go into your house and look at it, so it can miss things, such as condition, recent updates, renovations, unique features, as well as the size of the home. It may also not pick up some recent sales that have occurred in your area that support a higher value.
If the AVM is wrong, your request to drop PMI may get turned down. Not because your home is not worth enough, but because the AVM did not have accurate and up-to-date information.
An appraisal done by a real person will pick up on the things the AVM missed. The appraiser will actually measure the home to get accurate square footage, and they will personally inspect the property to note its condition, features, quality, and any updates that it may have had.
I have firsthand experience with how inaccurate an AVM can be. When you are trying to drop PMI, you want to make sure the appraisal reflects the most accurate information about your house as possible.
Why Ordering Your Own Appraisal is Smart
You should obviously know what percentages you are shooting for regarding equity, but before you call your lender about removing PMI, it may make sense to get an appraisal first. Because the appraisal can tell you where you stand before you start the process.
A lot of homeowners assume they have enough equity to remove PMI, but they don’t really know. Others assume they don’t have enough equity when they actually do. An appraisal takes the guesswork out of it.
If the numbers work, you can contact your lender knowing where you stand in the PMI removal process.
If the numbers aren’t there, that’s helpful information as well. You’ll have a better idea of how close you are and whether it makes sense to try again in six months or a year.
One thing to keep in mind is that not all lenders handle appraisals the same way. Some lenders will accept an appraisal ordered by the homeowner. Others require an appraisal from their own approved appraiser panel. That’s why it’s a good idea to call your lender first and ask about their requirements before ordering an appraisal.
Before ordering an appraisal, you can do a little homework on your own. You can look at recent sales in your neighborhood and compare them to your home. If homes similar to yours are selling for more than they were a few years ago, that’s a good sign that your equity may have increased. You can often find recent sales online through real estate websites, county records, or by asking a local real estate agent.
Keep in mind that this is only a rough check. Not all homes are the same, and things such as size, condition, updates, location within the neighborhood, and lot characteristics can affect value. Still, if recent sales show your home may be worth enough to meet your lender’s PMI requirements, it may be worth taking the next step and ordering an appraisal. The goal is not to determine an exact value. It’s simply to see if you’re in the ballpark before spending money on the process.
The cost of an appraisal is often small compared to the monthly savings from removing PMI. Let’s say your PMI payment is $175 per month and an appraisal costs $400 to $500. In that case, the appraisal could pay for itself in just two or three months. After that, the savings stay in your pocket every month.
The bottom line is simple. Before paying lender fees or starting the process, it may make sense to find out where you stand. An appraisal can help you make that decision with facts instead of guesses.
How to Start the PMI Removal Process
Step 1: Find your current loan balance.
The first thing you’ll need is your current loan balance. You can find that on your mortgage statement. This is the amount you still owe on your loan.
Step 2: Get an idea of what your home may be worth today.
Before spending money on an appraisal, it may be worth doing a little research. Look at recent sales in your neighborhood. You can also talk with a local real estate agent who knows the market.
The goal isn’t to determine an exact value. You’re just trying to find out whether you’re in the ballpark.
Step 3: Do the math.
Take your current loan balance and divide it by your estimated home value.
For example, if you owe $200,000 and believe your home is worth about $260,000, the result is approximately 77%.
If the result is 80% or less, there is a good chance you may qualify for PMI removal. Of course, your lender will make the final determination.
Step 4: Call your lender.
This is an important step because every lender is a little different.
Ask about their PMI removal requirements. Ask whether they allow PMI removal based on appreciation. Also, ask whether they will accept an appraisal you order yourself or if they require one through their own process.
A five-minute phone call can answer a lot of questions.
Step 5: Order the appraisal.
Once you know your lender’s requirements, it’s time to order the appraisal.
Some lenders will let you hire an appraiser directly. Others will want to order the appraisal themselves. That’s why it’s important to ask first.
Step 6: Submit the information to your lender.
After the appraisal is complete, send the appraisal and any other information your lender requires.
The lender will review everything and let you know whether your PMI can be removed.
That’s basically all there is to it. Most of the process involves gathering information and understanding your lender’s requirements. If your home has increased in value over the past few years, it may be worth taking a closer look.
Conclusion
I hope this information has been helpful in learning more about the process involved in dropping PMI. While there’s a chance that you may not qualify to drop PMI, there’s also the chance that you will. And if this is the case, it can help you determine if you are paying for something you may no longer need. If I can answer any questions, feel free to contact me, and as always, thanks for reading.
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