What is PMI?
PMI (Private Mortgage Insurance) is put into place to protect the lender in the event that you default on your primary mortgage and the home goes into foreclosure. When you put down a lower amount than 20% on a home loan, a lender will consider the loan as a riskier investment and require that the homebuyer buy private mortgage insurance (PMI) with a premium that will be included in the monthly mortgage payments. Freddie Mac estimates it costs between $30 and $150 per month for every $100,000 borrowed.
Do all mortgages come with PMI?
The simple answer is no. If you purchased your home with a down payment of 20% or more then you would not have PMI on your home loan.
Until recent years, it was a widely held belief that you couldn't buy a home unless you had at least 20% to put down on it. That's so far from true, but a reason many people pushed that notion was out of avoidance of Private Mortgage Insurance. When the expense of rent meets or exceeds the cost of a monthly mortgage payment, however, some PMI cost in the mix is of mild concern when you can have your own place and begin building equity. Savvy people have bought homes with as little as 3% down, or less utilizing specific government funding, and accepted the (PMI) cost with the recognition that waiting to own vs. rent could cost them much more down the road. What they may not have realized is that a very short distance down the road they may have the opportunity to eliminate it without scrimping & saving to pay down the principal.
3 Ways to eliminate PMI:
Two ways are simply pay-downs and may take time to build to... Another way is another valuation.
Automatic termination, Written Request, & Updated Appraisal
- For borrowers that are current on their loan, PMI automatically terminates once the principal balance reaches 78% of the original value of the home at time of purchase
- For borrowers also current on their loan and confidently paid to 80% of the original value of the home, a written request can be made to the mortgage servicer to cancel the PMI
- Generally, you can request to cancel PMI when you reach at least 20% equity in your home... paid or *otherwise. You may get to that 20% benchmark faster due to rising property values in your area +/ or by investing in home improvements. An updated appraisal, or valuation, will let you know where you sit and while it does cost a few hundred dollars, it could save you thousands of dollars over what would have been the full PMI term for your loan. Before scheduling and paying for an appraisal, check-in with your lender to be sure they allow this method. Some may only allow this with a refi, and with rates up at present it would not make sense to take this step. As the saying goes, you miss 100% of the shots you don't take... it is worth a shot to see if an updated appraisal would absolve you of PMI. **Please note that, as of 2013, FHA loans will not allow PMI to be eliminated by any other means than pay downs or refinancing.**
What would PMI savings look like?
PMI typically costs between 0.5% and as much as 5% of the original amount of a mortgage.
An illustration: You find a home for $280,000 and put 10% down. Your loan amount is $252,000. The mortgage insurer charges 0.50% of the mortgage amount for a total annual premium of $1,247.90. This amount is divided by 12 which comes to $103.99 and is added to your monthly payment. This amount does NOT go toward principal reduction. It simply vanishes into thin air and could otherwise be used for debt reduction or savings and investment.
If an appraisal shows a substantial value increase, would the taxable value go up too?
Appraisals are not the same as property assessments.
It's logical to wonder if an appraisal showing an increase in property value might mean an increase in property taxes; thankfully, that isn't the case. Property appraisers don't do appraisals for homeowners and then forward copies to local government taxing bodies. Municipalities use their own specific form of real estate valuation for property taxes and do so on their timeline.
Are you paying PMI? What would you do with money saved once you eliminate it?
