If your loan-to-value (LTV) ratio when your mortgage closes is greater than 80%, you are usually required to pay private mortgage insurance (PMI). PMI is an ongoing monthly fee calculated based on your outstanding mortgage balance.
PMI rates vary based on your credit score, LTV ratio, mortgage program, loan length and other factors and range from approximately .20% to 1.90% of your loan amount. For example, for a $100,000 mortgage with a PMI rate of 1%, the monthly PMI fee is $83.33 ($100,000 (mortgage) * 1% (PMI rate) = $1,000 / 12 months = $83.33 (monthly PMI fee)).
Depending on your loan amount and PMI rate, the monthly PMI fee may be a significant extra cost you are required to pay on top of your mortgage payment. The good news is that PMI is cancellable, which means it can be removed when your LTV ratio reaches a certain level either because you have paid down your mortgage balance or because your property value has increased.
Review What is PMI and When Am I Required to Pay It?
It is in your best interest to have PMI removed from your mortgage so that you can eliminate this additional expense from your monthly housing costs. The good news is that PMI is automatically removed when your LTV ratio reaches 78% based on your scheduled mortgage payments and the value of your property when your loan closed.
For example, if your LTV ratio is supposed to be 78% 60 months into your mortgage, then the lender should cancel PMI after your 60th monthly payment, as long as you make your payments on time and are current on your loan.
In this case, you do not need to do anything for your PMI to be removed -- simply make your regularly scheduled mortgage payments and the PMI should fall off as scheduled. If for some reason, the lender does not cancel PMI when your LTV ratio hits 78%, call the lender and they should remove it immediately to comply with mortgage regulations.
But what do you do if you want to remove PMI before your LTV ratio falls below 78% based on your mortgage payment schedule? There are three main scenarios when this may be the case:
You paid down your mortgage balance ahead of schedule
Your property value increased due to renovations
Your property value increased due to home price appreciation in your area
For these three situations you usually need to submit a request to your lender for PMI to be cancelled earlier than scheduled. The requirements to have PMI removed, including the maximum LTV ratio, vary based on the specific details of your request so we review each of these three scenarios in detail below.
You paid down your mortgage balance ahead of schedule. If you overpay your mortgage and pay down your principal loan balance faster than required, you can request removal of PMI when your LTV ratio reaches 80% based on the original property value when your loan closed.
For example, if your appraised property value when your mortgage closed is $100,000 and your loan amount is $95,000, your LTV ratio is 95%. If you come into extra funds and decide to pay down your mortgage balance by $15,000 six months into your loan, your LTV ratio is approximately 80%.
At this point, you can request that the lender removes PMI based on the original property value. It is important to emphasize that in this situation your PMI cancellation request is based on the original property value, and not the current property value, so you are not required to obtain an appraisal report. The lender should be able to quickly process your request by looking at your current mortgage balance and calculating your updated LTV ratio. As long as your LTV ratio is 80% or less, the PMI should be removed from your mortgage.
Your property value increased due to renovations. If your property value increased due to remodeling you can request to have PMI removed based on your current property value. Although you typically cannot request the cancellation of PMI based on the current property within the first two years of your mortgage, you can apply for a waiver if a higher property value, and lower LTV ratio, result from significant property improvements or upgrades.
In order to have PMI cancelled because of a change in property value due to renovations, you are required to submit a request to the lender including an appraisal report that verifies the after-renovation property value. If you are within the first two years of the mortgage, the maximum LTV ratio is 80% and if you are in years three through five of your mortgage, the maximum LTV ratio is 75%, which means it is more challenging for PMI to be removed.
Your property value increased due to home price appreciation in your area. If your property value increased because home values went up in your neighborhood, you can also submit a PMI cancellation request based on your current property value. Please note that most mortgages do not usually permit the removal of PMI within the first two years of your loan due to an increase in property value not associated with renovations. Simply put, if your property value increased because the real estate market improved, and not because you upgraded your property, you are required to wait two years after your mortgage closed before PMI can be removed.
After two years have passed you can submit a request to the lender to remove PMI based on the current property value. If you are in years three through five of your loan, the maximum LTV ratio for the cancellation request to be approved is usually 75%. In most cases you are required to pay for an appraisal report that verifies the current, higher property value.
How to Contact Your Lender to Have PMI Removed
If you believe that you meet the requirements outlined in the scenarios above then you should contact your lender and request that your PMI is removed. After speaking with your lender, we recommend that you send them a registered letter that outlines your cancellation request, including the reasons why PMI should be removed as well as your estimated current property value and LTV ratio. Your next step is to follow-up with your lender to make sure they have started the PMI review process as some lenders may employ delay or stall tactics.
If your PMI removal request is based on your original property value, the lender should be able to review your current mortgage balance to determine if your LTV ratio meets the 80% threshold.
If your removal request is based on your current property value, the lender orders an appraisal to assess the current fair market value of your property. You are typically required to pay the appraisal report fee which generally costs $350 - $750 depending on your property value and other factors. The lender has 30 days after the appraisal has been provided to notify you if your request to remove PMI has been approved or declined.
Because of the appraisal report cost, we recommend that you understand your estimated property value by consulting a real estate agent or reviewing your property value online before you submit your removal request. Although these sources are different and potentially less accurate than an appraisal report, knowing your estimated property value should help you better understand the likelihood that the lender approves your request.
If the lender approves your cancellation request then you should no longer be required to pay monthly PMI going forward. Please note that for your PMI cancellation request to be approved, you must be current on your mortgage with no 30 day late payments over the prior year or 60 day late payments over the prior two years.
Additionally, PMI can only be removed in cases where you pay for the PMI separate from your mortgage payment. PMI cannot be removed from mortgages with lender paid PMI, when the borrower pays a higher mortgage rate instead of paying PMI separately.
If the lender denies your request, you can appeal this decision and order a second appraisal report but there is no guarantee the outcome will be different, plus you are required to pay another appraisal fee.
In closing, requesting the removal of PMI from your mortgage usually requires extra time, documentation and money on your part but the effort and cost are usually worth it. If you follow the right steps and meet the LTV ratio requirement based on your specific situation, eliminating your monthly PMI fee can save you a significant amount of money in the long run.
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