Unless you’re one of the lucky few who purchased your home with cash or a large down payment, you are likely paying PMI, or private mortgage insurance. Lenders require this on your mortgage when your loan-to-value ratio is any higher than 80%. In plain English, if you borrowed more than 80% of what you paid for your house in the form of a mortgage, you’re paying this.
Private mortgage insurance is in place to protect your lender in case you should default on your loan. But here’s the trick: The value of your home changes. That means you can sometimes reach that 80% mark without actually paying it down to that level, as your home appreciates.
Many lenders (there are exceptions, some depending on what your loan program is) will allow you to prove that your property value, and therefore your loan-to-value ratio, has changed. If you can prove that, the PMI can often be removed from your loan. That can save you a couple hundred bucks a month!
Let me give you a concrete example, from my own home (numbers have been changed for the sake of easy math and because hey, mind your own beeswax):
We bought our home in SW Portland in December 2012. We paid $250,000. Our down payment was $15,000. That means our loan-to-value ratio at the time of purchase was 94%. We were required to pay PMI, and the premium was $150 per month.
Then the market started appreciating like crazy in our neighborhood, and we also did about $50,000 worth of renovations on the home. We were pretty sure our house was worth much more.
I called our lender to see what their process was to remove the PMI from our payment. Our lender (Wells Fargo) allowed us to pay to have an appraisal completed (this cost us about $350 out of pocket). If we hit that magic 80% number, they’d delete the PMI.
Our appraisal was completed in about two weeks and the value came back at $350,000 due to appreciation and renovations. Since we’ve owned our home more than two years and at this point, owe about $210,000, our loan-to-value ratio moved to 60% and the PMI was removed.
All the details are going to depend on your specific lender and loan. But generally, lenders will require you to pay the PMI premiums for two years. So if you just bought your house recently, hang in there. Otherwise, it certainly doesn’t hurt to ask how you can save this money each month.
If you want to double check on your property’s value before you call and pursue this option, I’d be happy to run the numbers on your house and give you my opinion of its current market value. Contact me at email@example.com for a comparative market analysis.