Is it time for you to get rid of PMI? Is it even worthwhile to do so?
If you purchased your home with less than 20% down, then more than likely you are paying some form of PMI, private mortgage insurance. The good news is that rising property values offer the potential for eliminating it! You may not think about it each month, because there’s no separate payment made, but that doesn’t mean you can’t save money and possibly get rid of PMI!
First, you need to determine the current value of your home.
That’s where we can help. We are always happy to review with past, present, or potential future clients how much their home might be worth. These days, some obvious signs of a big increase in value would be high sales volumes in your immediate area, or if you have renovated and made improvements to your home.
But before going through the exercise of eliminating the PMI, reach out to us and see to it that it’s worthwhile.
Once you’ve established that your equity in your home is now sufficient enough to get rid of PMI (meaning, you have a 20% or greater equity position), here are your options:
Option 1 – Petition your lender to get rid of PMI
This is a trick that many people don’t realize exists, and your lender definitely isn’t going to highlight this for you. When you closed on your home, you signed a massive amount of papers. Within those papers is your actual mortgage policy. This policy outlines the ways to have PMI removed. The obvious one is likely an automatic trigger once your loan balance is less than 80% of the original purchase price. But, they also allow for a process where you can contact them to have your property valued. If the valuation is great enough to give you more than 20% equity with your current loan balance, then the PMI can be removed. Here’s an example:
In this example, you only would have needed annual appreciation of 3.75% to have enough equity to get rid of PMI. The Chicago market as a whole has seen sales prices rise around 6% a year for the last 3 years. While it’s not always a direct calculation, it’s definitely a sign that your home is worth more now, even if you haven’t made improvements. And if you have made improvements, then you would be even more likely to have sufficient equity to remove the PMI.
Note: Most lenders will pass through the fee to you for the valuation of your home, which will range from $200 – $500, but well worth it if you potentially save hundreds or thousands of dollars each year.
Option 2 – Refinance Your Mortgage to get rid of PMI
This is another option. It could be appealing if you had credit woes and didn’t get the lowest interest rate, and is the only option if you have an FHA mortgage. Of the two options, it is the more expensive as you will have to pay for a full appraisal, and some loan underwriting fees and closing costs. However, because interest rates have gone up, you likely will be going into a mortgage with a higher interest rate. Using the same assumptions as the first example, here’s how a refi could remove your PMI:
Take notice that in this example, your actual mortgage payment has increased. However, without PMI, you are paying $82 less per month. The drawback is that the cost of the loan over time has increased significantly, and you are resetting your amortization schedule. It will take a couple of years for the savings to equal what the refi costs, so we would only recommend doing this if you cannot petition your current lender, and you plan on staying in your property for at least another 3-5 years.
Note: Whether or not it’s possible or makes sense to get rid of PMI is going to depend on several factors, but know we are here to help! We are always available to give you a market analysis of your property and let you know what your options are, and which ones might work best.
THE BOTTOM LINE: Many people don’t even realize this is possible! While the actual monthly amount might not be a huge swing, over time, this amounts to thousands of dollars that could be in your pocket!