LOVELAND – Did you put less than 20% down on your home loan? Are you paying a monthly PMI premium? If so, now may be a good time to evaluate your market value and possibly eliminate your PMI payments.
What is PMI?
PMI is what lenders normally charge when you have a down payment less than 20% of the purchase price of your home. It normally stays in place until you pay your loan down to a certain amount (usually around 80% of the original purchase price).
Does your loan allow early PMI removal?
Check your loan documents for the PMI terms. Previously, almost all home loans automatically removed PMI when your loan balance dropped to a certain level, such as 78% or 80% of the original purchase price. Some quoted two different percentages, one where the PMI was automatically removed and a higher percentage where you could prompt removal.
Nowadays, there are some loans that include lifetime PMI. For example, newer FHA loans do not allow PMI removal at all. The only option is to refinance. Additionally, some loans require that you pay PMI for a certain number of months before you may qualify for PMI removal. If you do not have a copy of your loan document, contact your lender for this information.
How much does your home need to increase in value?
If the value of your home has increased to the point where your loan balance is 80% of the market value, then it’s time to look into removing that monthly PMI charge. For example, if you purchased a $500,000 home and put 5% down, your initial loan amount was $475,000 (or 95% of the price). Let’s assume you’ve had your loan for 2 years and the balance is now $457,000 (91.4% of the original price). Normally, you wouldn’t be able to eliminate PMI yet. However, if market value has increased to $571,250, then your mortgage balance is 80% of the market value. Therefore, you may be able to eliminate PMI payments.
The PMI removal process
Your lender will require a formal appraisal, at your expense, to determine the current market value of your home. An independent appraiser will visit your home and then prepare a report that compares your home to similar and recently sold properties. The report will produce an exact dollar value, which will then be used by the lender to determine whether PMI may be removed.
Typically, this process does not require a refinance or change in other loan terms. Although there is a cost involved (usually $400-$600 for a single family), it is worthwhile if you can save several hundred dollars each month on that PMI charge.
The above is merely a general overview of this process. Please contact your lender for more detailed information.
Suzanne Plewes is a Broker Associate at RE/MAX Alliance in Loveland. If you have questions regarding real estate, please write to 750 W. Eisenhower Blvd., Loveland, CO 80537, call 970.290.0373 or e-mail [email protected].
By Suzanne Plewes, RE/MAX Alliance