How do I get rid of PMI?
Mortgage Insurance (MI) is a necessary expense for getting into a home without putting a 20% down-payment. For the sake of this article lets posit you have a monthly mortgage insurance expense that is getting very t – i – r -i – n – g. In COVID-19 era homeownership, it is wise to be as efficient as you can with your finances and expenses which includes managing your PMI expense so there’s no waste and it’s not attached to your mortgage bill even a month longer than it should be.
There are several types of Mortgage Insurance – each with its entirely own user manual for purpose and removal. There are also a lot of misconceptions surrounding MI:
– Does it or does it not automatically dispatch? (both true for certain cases!)
– You can always refinance out of PMI. Not true. What if your equity has eroded? Or if current rates exceed your cost of carrying PMI, or the program you seek is now retired. Think those scenarios are far fetched? Between the 3 of those possibilities, one of them is at play more often than none of those scenarios are at play – totally sabotaging your future game plan.
– Getting to 20% Equity will remove my MI. This is almost entirely NOT true. Modern MI (for the past 7 years is for the life of the loan. PMI has two thresholds (details below) at 22% or 25% (or higher) equity needed to dispatch PMI.
So first up you need to ascertain if you have a conventional mortgage or an FHA mortgage. VA mortgages, do not have monthly mortgage insurance. USDA and MassHousing require a separate explanation.
Let’s start with a conventional mortgage (non-government mortgage). The FHA explanation of its own MIP is another chapter that will come later.
What is PMI and Why do you Need It? You pay mortgage insurance against your potential default. PMI is an insurance (that’s the “I” in the acronym). While you derive a benefit from PMI (which is your ability to buy a home without a 20% down-payment), the insurance isn’t for your protection. This is important to realize. YOU are not PMI’s customer the LENDER is …. even though you pay for it, it addresses the lender’s risk.
Since there are several companies that provide PMI the removal rules will vary between PMI companies but here are the 3 techniques that will allow you to drop PMI.
I. PATIENCE AND CONFIDENCE
Good financial planning would recommend you mark your calendar with the terminus date specified by your PMI contract provided to you at the time of closing.
That dispatch date is pre-loaded into your amortization schedule with the lender so they don’t forget to honor the contract. The payment after that dispatch date will not have the PMI payment. No action required. No phone call to your lender, or appraisal required. It is simply over. To help figure out that date, take your purchase price and multiply that by .78. Obtain (or create) an amortization table* and slide your finger down to that value. The month date that corresponds to that number is your last PMI payment. Congratulations. If you need help with an amortization table please ask us.
II. THE TIDE RISES
The sale prices for your neighbor’s houses have gone up. Way up. Like 22% up. This leads you to believe your house may have enough equity to ditch PMI. But that won’t happen on its own. If you want to supersede the PMI contract and the date logic described above, you will need to follow the PMI instructions. Step one is to obtain that contract or those instructions from your lender.
Review the rules presented to see if you are ineligible for PMI removal any reason (you must meet minimum time under PMI and cannot be past due on your mortgage or in forbearance). You’ll also notice that the hurdle bar may have been moved. The increase in required Equity may have moved from 22% to 25% (but again each PMI company is different- so you’ll want to verify this.).
Do you think your mortgage lender will accept your estimate or Zillow’s opinion on your value? Of course not. You’ll need to prove the new value via an appraisal at your own expense (est $500). The appraisal needs to be performed by a licensed appraiser on the lender’s approved list, not your sister-in-law the realtor. Once you properly present (and prove) your case on the value you can expect PMI to drop from your monthly payment and free up your cash flow. Congratulations … it’s like getting a pay raise.
III. CUT THE LINE
You receive a sum of money from a bonus, tax refund, gift, or inheritance and apply it to your mortgage’s principal therefor accelerating the amortization schedule and your position in it. While this moves you closer to your equity position it does not change the dispatch date (remember the DATE is preloaded at with the Lender, not the mortgage balance target) From here you need follow the steps listed in THE TIDE RISES paragraph.
If you have an FHA mortgage the rules of Mortgage Insurance (FHA refers to it as MIP – same three letters, different order) are entirely different.
1st it depends on WHEN your FHA mortgage was written. For mortgages written after June of 2013 MIP became permanent for mortgages with less than a 10% down payment. If you put more than 10% down payment you would most likely have the obligation for 11 years.
But mortgage applications written prior to 6/2013 may have an automatic date approaching or could take a path similar to Rising Tide or Cut the Line from above.
Depending on the base rate you are carrying in ANY of the above scenarios it could warrant retiring the current mortgage swapping into a lower rate with a shorter term AND saying goodbye to PMI in the process. Read our article on WHEN to consider refinancing?
If the refinance option does not entirely clear the hurdle of equity (20%) that may STILL be a success. If you come back into PMI with, let’s say, an 82% Loan-to-Value (18% equity) PMI will be much less expensive and also will last for many fewer years. It could be either a double or triple, depending on your proposed new rate.
Here’s an example. You buy a house with a 5% down payment and expect to pay PMI for 9 years. Two years later your house appreciates by just 10%. At that time you refinance to a lower rate, take new PMI which will cost appx 1/3 the cost, and will now have a dispatch date in 4 years. That’s still a triple win (lower rate, lower monthly PMI, and 3 years LESS time paying PMI). These hybrid solutions are complicated but very advantageous to the sophisticated homeowner trying to build personal wealth at a quicker pace).
Love it or hate it, PMI is a necessary part of our industry. We couldn’t help but to become experts in it. If you believe it will help you in any way, we’d be happy to share our knowledge on the subject with you, without even a hint of an obligation to work with us.
Regardless of which path you take the efforts are very worth your while. This endeavor may be your highest paying use of your time in 2021. Good luck.
*Amortization schedules are pre-loaded onto most PC’s via Microsoft Excel. Open Excel, Select File, New, Template, then search Amortization Schedule. You will need to enter only a few fields. You’ll need to know the date of your first payment (typically the 2nd month after you bought your home). Then the other fields are annual interest rate (Note rate, NOT APR), number of years of the loan (30 or 20, etc), and 12 payments per year. Easy, right? Please call us if you have any questions.