Getting Rid of Private Mortgage Insurance (PMI)
When purchasing a home, it’s often necessary to take out a mortgage. In doing so, there are decisions to make regarding the loan. Some of the options will depend on what you qualify for, how much cash you have available for a down payment, and what you value most in your financial plan. One important thing to know is that lenders frown upon lending too much to you based on the value of the home. If you don’t put 20% of the property value down on your mortgage, you’ll be stuck with something called “private mortgage insurance,” or PMI. Unlike other insurances in your life, PMI is in place to protect the lender, not you, in case you stop making payments on your loan. PMI stays in place until your “loan-to-value,” or LTV, calculation reaches 80%, at which time you aren’t viewed as such a big risk anymore. To put this in context, a $400k home would need to have a loan less than $320k to avoid, or remove, PMI.
As you make mortgage payments, a portion of each payment is applied to the principal of your loan, so over time, you get closer to the 80% threshold. In theory, you would hope for your property value to appreciate as well. While every home is different, and different pockets of the country appreciate differently than others, the real estate market has generally seen a big uptick in property values post-covid. So, if you’re a more recent homebuyer and did not elect (or were not able) to put 20% down on your loan, it might be worthwhile to explore where you are in your loan-to-value calculation and how close you might be to getting rid of your PMI.
Here are some steps you could take.
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Call your lender and ask about your options. You may want to pay for a formal appraisal to be done on your home to have the lender update the value of the home. This could be especially helpful if you’ve done some home improvements since purchase. For example, if you purchased a property for $400k, and only elected a 10% down payment, you loaned $360k and are paying PMI until the loan falls below $320k, 80% of the value. If over the course of a couple years the property appreciates to $450k, 80% of the new value would be $360k. A formal appraisal could potentially remove your PMI.
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What if the property may not have appreciated a lot like in the example above? If you’re in a better financial position than you were at time of purchase, you might consider making a lump sum principal payment to get closer to the 80% LTV goal. Let’s say the property appreciated to $420k. The new target 80% LTV would be $336k. Depending on how many payments you made over the last several years, your original $360k loan would be reduced based on your amortization schedule. If it were reduced to say $345k, you could make a $9k lump sum principal payment to remove the PMI.
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It would be worthwhile to think about the impact of this. According to NerdWallet1, PMI rates vary for lender to lender and can also depend on factors like down payment and credit score, but typically cost anywhere from 0.33% to 2% of the loan value. So, there is an argument to be made to keep paying that if your cash savings interest rate exceeds your PMI rate.
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If cash flow is good for you/your household, you might consider rounding up on your payments to accelerate the payoff. Any payment above the minimum requirement is applied to principal of the loan. Since the interest you owe is calculated each month, that little extra payment reduces the subsequent month’s interest, creating a positive domino effect. A little bit can go a long way to getting you under the 80% LTV mark quicker. Consider using an amortization tool to play around with the impacts of small changes. They are easy to find online!
Part of financial planning is regularly reviewing cashflow, savings, assets, and liabilities. So, whether it’s to refinance or eliminate your debt, increase or reallocate savings, or – in this case - cancel PMI, adjustments can often be made in effort to be efficient with your hard-earned dollars! Check out your loan and see what options you have.
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Investment Advice offered through Great Valley Advisor Group, a Registered Investment Advisor. Great Valley Advisor Group and Haas Financial Group are separate entities. This is not intended to be used as tax or legal advice. Please consult a tax or legal professional for specific information and advice.
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