How, Exactly, Do You Pay off Private Mortgage Insurance (PMI)?
What is private mortgage insurance? Many people wonder this. In fact, when a buyer decides to buy a house, this is often the first time they ever hear of this term. Private mortgage insurance is a monthly expense added to your monthly mortgage, when the buyer put less than 20% down for the down payment. What PMI does, is it protects your lender in case you default on your mortgage and the lender must sell your home. There are two routes you can take when it comes to paying this fee off.
First option: pay your mortgage down
While this is the slowest way to get rid of PMI, it does work. What you do is (obviously) start by paying your mortgage on time. 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 years and years. 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. Most of us have a little extra money each year coming from somewhere (whether it’s a Christmas bonus, or a tax return). You can use things like this to make that extra payment, instead of spending it on a shopping trip, or a vacation.
Second option: add value to your house
The reason that this option works, is that adding value to your house decreases your LTV ratio. Do realize that not every upgrade will actually add a lot of value to your house. Many of them, you may not even break even with.
Usually, it is the kitchen and bathrooms that rake in the value. Exterior remodeling also reaps lots of return. For example, adding a new front door or re-painting the veranda. Small, kitchen improvements will add value as well. Even changing out the hardware and painting the cabinets. Another thing that will help, is if the neighborhood happens to increase in value. Of course, this type of factor is out of your control, but if it happens, it will definitely help you!
Once you feel that you have a 75% percent or lower value on your house, call your lender. Each lender has different guidelines for how they go about removing PMI. There is no standard. Some banks will ask you for an appraisal, and then they will review it. Others just want to look at your payment history.
You’re going to still have to pay a few hundred bucks for an appraiser; unfortunately, the bank is going to choose the appraiser, so you can’t appraiser shop, trying to find the best rate. The appraiser is going to take photos, and review the comps, then hand back the findings to the bank, along with their opinion. If the value proves that your LTV is 75% or under, the bank will likely remove your private mortgage insurance payment.
Note that there is a Homeowner’s Protection Act in place that requires mortgage lenders to cancel your PMI once your loan has been paid down to 75% of the overall loan amount.