What is PMI?
PMI is an acronym for Private Mortgage Insurance. If you’re buying a home and pay less than a 20% down payment you will be required to pay PMI each month. It is an insurance that is paid to your lender in case you default on your mortgage loan. PMI removal requires certain conditions to be met including an appraisal.
What is PMI Removal?
PMI removal involves having the premium for this insurance removed. This can result in your mortgage payment being lowered, or if the premium is paid separately, the policy would be removed entirely and you would not be required to pay it any longer.
In order to discontinue PMI your loan amount will have to be meet certain guidelines imposed by the lender. This usually involves the loan amount being around 80% of the market value of your home.
This can be achieved a couple of different ways. The first is that you could make a large enough payment so that the amount owed is lowered into the range required by the lender. For example, using easy round figures, let’s say the balance on your loan was $100,000 and the market value of your was the same. If you could pay the loan down by $20,000 then the balance would be $80,000 and the loan to value ratio would meet the lender’s requirements and you could pursue PMI removal.
Another example might occur if there has been appreciation of property values in your area. If the value of your home has risen so that the current loan amount is 80% of its market value then you could also get in removed. If we use the previous example of a loan balance of $100,000 then your home would have had to appreciate in value to $125,000. Keep in mind that a combination of market appreciation and monthly payments that reduce the loan balance can work together to reach the 80% threshold as well.
These two examples illustrate the various ways that the required loan to value ratio can occur. After you find out your loan balance your lender will let you know what your home will need to be worth to meet their criteria and qualify for PMI removal.
Getting an appraisal to help with PMI removal
After your lender tells you what your home will need to be worth, it will be up to you to provide evidence that it is worth this amount. This is where the appraisal comes in. In my experience doing PMI removal appraisals it has been split down the middle regarding who the lender will allow to do the appraisal. Some will require you to use someone that is on their approved panel of appraisers, however others will allow you to choose your own appraiser.
Whoever you choose, you’ll need to arrange for the appraiser to visit your home to do the appraisal. You’ll want your home to appraise for as high as possible so it’s important that you present it to the appraiser in the best possible light. In addition to making sure the home is in great shape you’ll want to be sure to provide the appraiser with information regarding any updates or renovations you’ve made to the home over the past several years.
The appraiser will provide the report to the lender after it is completed and they will then determine if the loan to value ratio is acceptable for PMI removal.
Conclusion
PMI removal can work in your favor if the ratio of your loan amount to the market value of the home is sufficient. After the real estate market crashed in 2007 most property values declined to such and extent that the loan to value ratio of most homeowners was not sufficient to drop PMI. With many markets making a recovering property values are starting to increase, so you may want to start thinking about PMI removal to save money each month.
Question
Do you have a question about PMI removal? If so let me know by leaving a comment, or if you have a story that would be beneficial to other readers please share that as well. Thanks for reading.
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It’s been a good market for PMI removal in light of the increase of value over the past few years. This has definitely been true in the Sacramento area, and I would suspect it’s true in many markets. A friend just did this and the monthly savings really helps them since they are on a very limited budget (teacher’s salary (ironic that teachers get paid so little)). I concur with your experience too in that some lenders will allow a home owner to hire their own appraiser and others will choose the appraiser. That is exactly how I’ve seen it play out.
That’s awesome Ryan! This is good non-traditional appraisal work that we should try to get in on. Thanks for sharing your experience.
Great article for consumers. PMI with many larger banks will fall off automatically when they get to 20% equity of initial loan value, but getting an appraisal can definitely be used to justify it falling off early. Or if you have a smaller lender where it doesn’t fall off this could save you a lot of money. Nice post!
Hey Chris, thanks for the kind words. I thought it was about time for a PMI article with property values starting to creep back up.
Thank you for explaining PMI removal Tom. I always love hearing your take.
Thanks Gary!