There are three things you can do when your home value increases — sell your house and buy another one that’s also more expensive, pay more in property taxes, and get rid of your private mortgage insurance (PMI) payment. No longer having to pay PMI may not sound exciting or even like it would save much money, but if you’re going to waste money, you might as well do it on something fun instead, right? Or you could do the responsible, adult thing and add the money you save on PMI to your retirement savings or pay off your mortgage sooner. Whatever you decide to do with it, here’s how to answer, “Can I cancel PMI if my home value increases?”
There are two key things you need to know to cancel PMI.
- What exactly is PMI and why can you get rid of it?
- What’s a loan-to-value ratio, and how do you calculate it?
PMI isn’t just extra money you have to pay on your mortgage each month. It’s a particular type of insurance for your lender. It protects them from taking losses on a foreclosure if you default on your mortgage. In short, if you have a low down payment and home prices go down, your house might be worth less than what you owe the bank. Since banks can never lose, you have to buy PMI.
Since PMI exists to protect the bank, and they don’t care if you lose your equity, you also need to know about the loan-to-value ratio (LTV). If your loan-to-value is good enough, you either don’t require PMI to begin with, or you can cancel it. The loan-to-value ratio is what you owe on your mortgage divided by the value of your home. If you owe $80,000 on a $100,000 house, your LTV is 80%.
Now, this is where banks get tricky. The magic number for not needing PMI is usually an LTV equal to 80%. If you put 20% down, your LTV is good enough, and you don’t require PMI. If you put down less, you need PMI.
Next, to see if canceling PMI is worth the hassle, you must know its cost. This amount varies depending on your location and your lender, but it’s usually 0.5% to 2% of your original loan amount. If you borrowed $120,000 with PMI costing 1%, you’re paying $1,200 per year or $100 per month. We’re using low numbers here to keep the math easy, but you probably had to pay way more for your house, so your PMI is probably way more.
Now that you know what PMI is, why you need it, and how much it’s costing you, you probably want your answer to, “Can I cancel PMI if my home value increases?” The answer is usually yes if you do a little work.
You have to do some work because it’s your money, not the lender’s. They aren’t checking to see if your home value went up to remove your PMI. You have to tell them your home value went up, and you want to cancel PMI.
When you call your lender, they recalculate your LTV based on your home’s current appraisal. Some lenders use an internal system for appraisals at no cost to you, while others make you pay for an appraiser. That can cost around $300 to $400 or more in some areas.
The answer to this is straightforward. If you don’t have to pay for an appraisal, pick up the phone right now. If you do have to pay for an appraisal, it’s math time. Is the amount of money you’ll spend on PMI in the future more or less than the cost of the appraisal?
To figure that out, you need to know how else you can make PMI go away.
- Wait for automatic cancelation. There are two times the Fed steps in and says your lender has to cancel your PMI by law. One is when your LTV is scheduled to be at 78% based on your home’s value when you took out your loan. The second is when you’ve completed 15 years’ worth of payments on a 30-year mortgage.
- By request based on your home’s original value. You can also request to cancel PMI once your LTV reaches 80% based on your home’s initial value. This kind of splits hairs with the step above, but your lender might have other requirements, like you not having a second mortgage.
- Refinancing. When you refinance, whether you have to have PMI depends on the LTV of the new loan. Now, refinancing will usually be more expensive than getting an appraisal to get rid of PMI on your current loan. But if interest rates have gone down, or you can get a better interest rate because your credit has improved, you might be able to save on interest and get rid of PMI.
FHA loans have a mortgage insurance premium (MIP) instead of PMI. It’s the same thing with different letters except for one crucial difference. If you took out your FHA loan after July 3, 2013, and put less than 10% down, you can never remove MIP until you pay off your loan. The good news is that refinancing into a conventional loan counts as paying your FHA loan off, so you can get rid of PMI on an FHA loan that way.
There’s no real way to know if refinancing will save you money unless you check. Even if average interest rates are up, you might get a better rate than what you have because of changes in your credit or other factors. LemonBrew makes it easy to find out. Just go to LemonBrew Lending and click refinance to find out what you can qualify for.