How, Exactly, Do You Pay off Private Mortgage Insurance (PMI)?
Private mortgage insurance is a monthly expense tacked onto mortgages for home purchases in which you made a down payment that was less than 20 percent of the home’s appraised value. In other words, PMI protects your lender in the event you default on your mortgage and the lender must sell your home.
Option One: Pay Down Your Mortgage
While this is the slowest way to get rid of PMI, it is effective. Start by paying off your mortgage each month (on time, of course). Once your loan-to-value ratio (LTV) reaches a certain amount, you can contact your lender to begin the process of taking off the PMI.
Obviously, this will take some time depending on how much money you originally put down on the house. If you put no money down, it’s probably going to take several years more.
Remember that you are aiming here for 20% equity, because federal law requires mortgage lenders to notify homeowners at closing approximately how long it will take for them to reach the 80 percent loan-to-value assuming they make their regular monthly payments.
If you want to get the PMI off of your loan faster, pay down what you owe quicker by making one extra mortgage payment each year or putting your annual bonus towards your mortgage.
Option 2: Add value to your home
You may have to shell out some cash up front. Adding value to your home with upgrades is one way to help decrease you loan-to-value ratio. Not every type of home improvement adds substantial value to your home. In fact, many upgrades don’t even bring you any return beyond what you spent making the upgrades.
Typically kitchen and bathroom remodels add value, whereas things like adding pools do not. Exterior remodel projects such as adding a new entry door and repainting the stucco tend to get home owners the most return on their investment. After exterior projects, minor kitchen remodels and the like, will bring the next best return on your money.
If you’re lucky, the increase in value of your neighborhood will assist you in adding value over time without you actually having to do anything.
Once you feel that you have an 80 percent (or less) loan to value on your home, you can contact your lender using the general customer service line. Each lender has a different protocol for exactly how they process PMI removal requests. Some will ask that you pay for an appraisal and then send the appraisal in to them for review, while others will review your history of payments to make sure that you qualify prior to requesting that you pay for the appraisal.
In any case, the process isn’t free, you’ll have to pay a few hundred dollars for an appraiser of the bank’s choosing to come out to your house, take pictures and measurements and review the comparables in your neighborhood. The appraiser will then send his or her final opinion of value to your lender. If the value proves your LTV is 80 percent or less, they will remove the PMI.
The Homeowner’s Protection Act states that mortgage lenders are required to cancel your private mortgage insurance once your loan has been paid down to 78 percent of the principal loan amount, as long as you are current on your payments.