When you purchase a home, you choose the loan type and down payment based on rates, fees and your situation at the time. Having a 20 percent down payment will eliminate private mortgage insurance (PMI) but many buyers will put less than a 20 percent down payment, especially first-time homebuyers, and will be required to pay PMI.
Private mortgage insurance protects the lender, not you, if you stop making payments on your loan. This insurance is an additional monthly cost that is added to your monthly mortgage payment and can be several hundred dollars a month.
What borrows may not realize is once you have at least 20 percent equity in your home, you are able to remove that monthly payment from your mortgage, saving you hundreds to thousands of dollars a year. How you remove it will depend on the type of loan you have and your loan servicer.
As you know, we have been in a seller’s market the past few years and home prices have continued to increase. Your home should be worth more today than it was when you purchased it, and could be worth significantly more especially if you are in the lower to median price range which has seen the highest price increase.
The first step is to find out how much your home is worth. Chances are you are going to look on Zillow and check out the Zestimate but remember, Zillow uses an algorithm to calculate the value and doesn’t take into consideration location, upgrades, views etc. It will be good enough for a rough idea of your home’s value but if you think you need something more exact contact a local Realtor.
Once you feel you have at least 20 percent equity, you can look at the options you have to remove the PMI. The options available to you are going to depend on the type of loan you have and who your current loan servicer is (your loan may be sold to different loan servicing companies throughout the term of your mortgage).
CONVENTIONAL LOAN
PMI Automatically Removed
If you have a conventional loan, the loan servicer is required to remove the PMI when the loan balance drops to 78 percent of the original appraised value. Here is an example if you purchased a home in August 2016 for $400,000.
Example: $400,000 purchase price (and it appraised at $400,000), 5 percent down payment, 30-year term,
4 percent interest rate, $380,000 is the amount of your loan
The loan servicer will automatically remove the PMI when your loan balance is $312,000, which is 78 percent of the appraised value. It will take nine years before the loan balance is at $312,000 and the PMI removed.
Removing PMI From Your Current Mortgage
- If you purchased the home using the above scenario, it will take nine years for the PMI to automatically be removed. However, in today’s sellers’ market, it can take less than 3 years to have it removed.
- In August 2016, the median sales price in Mesa was $219,000.
- In August 2019, the median sale price is $271,500. That is an increase of 24 percent.
- If your home value has increased by 24 percent of the original appraised value of $400,000, your current appraised value would be $496,000.
- 20 percent equity of $496,000 is $99,200, so your loan balance needs to be below $396,800, which it would be since your loan balance is only $359,095.
If we want to be a lot more conservative and assume your home has only increased by 15 percent in three years, your current home value would be $460,000. Twenty percent of $460,000 is $92,000, so your loan balance needs to be below $368,000, which it would be at $359,095.
You can reach out to your servicer and ask them to evaluate your loan. The servicer will also require that there haven’t been any late payments (over 30 days) on the home loan in the previous 12 to 24 months. Each loan servicer has their own requirements, so you will need to talk to them to find out their process, and if it’s something they will do. If not, then refinancing is another option for you to remove the PMI.
FHA
If the loan is FHA, opened after June 3, 2013, and you put down less than 10 percent, the mortgage insurance stays on the loan for the life of the loan. This means the only way to eliminate the mortgage insurance is to refinance into a Conventional or VA home loan.
If the loan to value on your loan was 90 percent or less when you purchased or refinanced through FHA, your mortgage insurance will automatically fall off after 11 years.
REFINANCE
Most borrowers will refinance once they have the 20 percent equity, and this may be the best option for you especially in today’s market. Rates are low and your new rate may be lower than your current rate. If you don’t quite have 20 percent equity, you may still be able to refinance and remove the PMI. Another benefit of refinancing is you can convert a 30-year term to a 15-year and pay your mortgage off a lot sooner.
It’s important to remember when you talk to a lender about refinancing that you find out about all the costs, especially the lenders fees, so you can calculate if it’s going to make sense for you to come out of pocket to refinance.
Some questions to consider:
- How much will you save a month?
- What is the cost of refinancing?
- How much is the appraisal?
- How long to do you plan to stay in the home?
If you are only going to stay in your home a few more years, the cost of refinancing or a change in the interest rate may not be worth the amount you save.
Some lenders will refinance and you won’t have any out of pocket expense, but your rate may be a little higher. Make sure you do your homework and get all the fees and rates in writing before you make the final decisions.
If you would like more information on removing your PMI and refinancing, or a referral to a lender who can help you, please don’t hesitate to contact me.
Call me any time, and I will be happy to answer your real estate questions. Please contact me at Lorraine@Homes2SellAZ.com, or call (602) 571-6799. Visit my website at Homes2SellAZ.com.