Private mortgage insurance (PMI) is a common requirement for borrowers who put down less than 20% on a conventional mortgage. It protects the lender in case of default, but it also adds an extra cost to your monthly payment. Fortunately, there are ways to get rid of PMI, and a rising home value can be your ticket to freedom.
This article will explore how rising home value can impact PMI cancellation, the process involved, and alternative strategies to consider.
Understanding PMI and Loan-to-Value Ratio (LTV)
PMI acts as a safety net for lenders who provide mortgages with a lower down payment. Since the borrower has less equity in the property initially, PMI mitigates the risk of loss if the borrower defaults and the lender has to foreclose.
The key metric for PMI cancellation is the loan-to-value ratio (LTV). LTV is calculated by dividing your remaining loan balance by the current appraised value of your home. For example, if your original loan amount was $200,000 and you’ve paid down $20,000, your current balance is $180,000. If your home is now appraised at $250,000, your LTV would be 72% ($180,000 / $250,000).
Most lenders automatically cancel PMI when your LTV reaches 78%. You can also request PMI removal when your LTV reaches 80%, even if it happens sooner than originally anticipated. This is where rising home values can play a significant role.
Rising Home Value and PMI Removal
An increase in your home’s market value can push your LTV below the 80% threshold faster, even if your principal payments haven’t reached that point yet. This creates an opportunity to eliminate PMI payments and save money.
Here’s how rising home value can accelerate PMI cancellation:
- Market Appreciation: If your neighborhood experiences a general rise in property values, your home’s worth could increase without any renovations or upgrades. This directly impacts your LTV, potentially bringing it below 80%.
- Home Improvements: Strategic home improvements can also enhance your home’s value, lowering your LTV. Remember, the improvements should be substantial and add value that’s recognized by appraisers.
Taking Action: How to Cancel PMI with Increased Home Value
If you believe your home’s value has increased and your LTV might be below 80%, here’s what you need to do:
- Review Your Loan Documents: Your loan paperwork will outline the specific requirements for PMI removal, including the minimum LTV and any potential fees associated with an appraisal.
- Contact Your Lender: Inform your lender of your intention to cancel PMI and explain how you believe your home value has increased.
- Appraisal: In most cases, your lender will require a new appraisal to confirm the current market value of your home. This appraisal fee will likely be your responsibility. However, consider the cost-benefit analysis. If successfully removing PMI saves you significantly more than the appraisal fee over time, it’s a worthwhile investment.
Also read this: Does Renters Insurance Cover Temporary Housing?
Important Considerations:
- Waiting Period: Some lenders may have a waiting period, typically two to three years, before you can request PMI removal even if you meet the LTV requirement.
- Automatic Removal: Not all lenders automatically remove PMI at 78% LTV. Be sure to check your loan terms or inquire with your lender.
Alternative Strategies for PMI Cancellation
Even if your home value hasn’t increased enough yet, there are other ways to reach the 80% LTV threshold and eliminate PMI:
- Making Extra Payments: Consider allocating additional funds towards your monthly mortgage payment. This reduces your principal balance faster, lowering your LTV and potentially reaching the 80% mark sooner.
- Refinancing: Depending on current interest rates, refinancing your mortgage to a new loan with a lower balance could bring your LTV below 80%. However, carefully evaluate the closing costs and ensure the interest rate reduction justifies the refinance process.
The Bottom Line
Rising home values can be a powerful tool for eliminating PMI. By understanding LTV and the cancellation process, you can take advantage of a strong housing market and save money on your monthly mortgage payments. Remember to consult your loan documents and lender for specific requirements, and explore alternative strategies like extra payments or refinancing if your home value hasn’t risen enough yet. By being proactive, you can break free from PMI and enjoy the financial benefits of increased home equity.