Can I Cancel PMI if My Home Value Increases

Apr 14, 2022 | Mortgage Guides

Unlock Savings: How Increased Home Value Can Help You Cancel PMI

Private mortgage insurance (PMI) is a cost many people want to remove from their monthly mortgage payments. Generally, a homeowner must build up 20% of the equity in their home before they can cancel their PMI. However, it’s also possible to cancel a PMI through home improvements or a market increase in the price of one’s home.

‍This article will explore the different ways a homeowner may be able to request cancellation of their PMI. Increasing one’s home value is one way to potentially cancel a PMI, but there are other cancelation methods to consider as well.

What is Private Mortgage Insurance (PMI)?

Private mortgage insurance is different from homeowners insurance.  Homeowners insurance protects the property owner for damage to their property. Private mortgage insurance is a type of insurance that protects a lender from costs related to a buyer defaulting on the mortgage loan.

Private mortgage insurance is available for conventional loans (loans sold to Fannie Mae and Freddie Mac). Not everyone who receives a conventional mortgage has to pay for private mortgage insurance. PMI is traditionally required when a homeowner places less than a 20% down payment on their home or in a refinance situation if the loan-to-value exceeds 80%.

PMI is a common expense for homeowners. Most first-time homebuyers don’t have the resources to pay a down payment greater than 20%. Furthermore, even repeat homebuyers often don’t have enough extra money for a 20% down payment. In a refinance situation, the homeowner may not have sufficient resources to pay the mortgage balance down to 80% or less. In any of these cases, PMI may be required by the lender.

‍PMIs range in how much they cost homeowners.  The PMI premium is assessed annually, divided by twelve, and paid in monthly installments as part of the mortgage escrow payment.’ PMI premiums will continue to be assessed until it’s no longer required.

‍Lastly, not all mortgages require mortgage insurance. Some mortgage loan types may require mortgage insurance for the life of the loan. FHA mortgage loans have mortgage insurance premiums (MIP), which may last for the mortgage loan term, as do USDA mortgage loans.  VA loans require an upfront mortgage guaranty fee but do not require annual mortgage insurance payments.

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How Do I Pay PMI?

Different lenders will offer different ways to pay one’s PMI premiums. Here are the most common ways homeowners are able to pay PMI premiums:

A Monthly Premium – Most PMI premiums are paid through monthly payments. These premiums are monthly costs that are added to your monthly mortgage escrow payment. This premium is disclosed in the closing documents for the mortgage loan.

An Up-front Premium – Sometimes, people are able to pay their PMI premium as an up-front premium when they close on a mortgage loan. This payment method is less common than a monthly premium payment. Still, it’s an option lenders can sometimes extend to homeowners who want an alternative PMI premium payment method.

Up-front and Monthly Premiums – Lastly, some lenders offer homeowners a combination of an up-front PMI payment in addition to monthly installments.

Each lender is different. Some lenders may offer all three options; others may offer only one. Feel free to request different PMI payment methods from your loan officer. There may be some payment methods they don’t traditionally offer clients that may work better for you.

What is a Loan-to-Value Ratio (LTV)?

When considering PMIs, an important metric to understand is your loan-to-value (LTV) ratio. LTV is used by lenders to determine when someone is able to cancel their PMI. This ratio is the ratio of a homeowner’s mortgage amount compared to their home’s original purchase price or market value, whichever is less.

For example, assume you purchased a $400,000 home with a $30,000 down payment. In this case, your mortgage principal balance would be $370,000. To calculate your LTV, divide your principal balance ($370,000) by your home value ($400,000) and express that number as a percentage. Here, the LTV would be 90%.

LTV is the ratio lenders use to determine if someone needs PMI when they purchase or refinance a home. If a borrower’s LTV is greater than 80%, they’ll need to pay for PMI. LTV is also the ratio lenders use to cancel PMI when buyers reach certain thresholds.

How to Get Rid of PMI

PMI is a mortgage insurance premium that protects lenders from certain costs related to a buyer defaulting on their mortgage. PMI is entirely for the lender’s benefit. It’s an insurance premium that doesn’t benefit a buyer at all. Many people are aware of this dynamic and want to cancel their PMI. Thankfully, there are several ways to get rid of the PMI on one’s mortgage.

Make Mortgage Payments Until Your PMI Automatically Cancels

The federal Homeowners Protection Act (HPA) allows homeowners to cancel their PMI automatically when they reach a specific home equity value. Home equity is measured through the LTV metric discussed earlier. Thanks to the Homeowners Protection Act, borrowers may request early cancellation at 80% (under certain conditions), and lenders must terminate PMI when someone reaches an LTV value of 78% (as long as the mortgage loan is current at that time). Finally, if not already canceled, PMI must be canceled at the midpoint of the loan term amortization (For example, for a 30-year loan, the midpoint would be after the end of the 15th year of the loan term). ‍

To request early cancellation at 80%, an appraisal, and a good payment history are among the requirements for this cancellation request.  For example, if the current market value of the property is $500,000, the loan balance must be $400,000 or less to request early cancellation. For automatic cancellation at 78%, if the original property value was $500,000, they would need a loan balance of less than $390,000 for the lender to automatically cancel their PMI. The more a homeowner initially pays in their down payment, the earlier they’ll reach the LTV value to automatically end their PMI. However, you need to be up-to-date on all your mortgage payments to qualify for early or automatic PMI cancelation.‍

In rare situations, a homeowner may pay their monthly mortgage payment for years and never reach the 78% LTV cancelation limit. Thankfully, lenders are also required to cancel PMI if a borrower reaches the midpoint (or half) of their amortization schedule, as noted above. 

Request Approval for Early Cancellation at 80% LTV

As discussed, one way to end your PMI is to make a PMI cancellation request once your LTV reaches 80%. For people who make consistent mortgage payments each month, they can easily calculate the date they’ll reach an 80% LTV. Lenders will automatically cancel PMI at 78% LTV as long as the mortgage payments are current at that time. Still, getting PMI canceled sooner may stand to save one money.

It’s also advisable to make extra mortgage payments to reach the 80% LTV limit faster. There are a handful of mortgage payment strategies to pay down the principal loan balance faster. Some people make an extra mortgage payment a year; others add an extra amount to their payments each month. Still, others will make large single payments against their principal loan amount. All these methods lower the principal loan amount, which speeds up gaining home equity.

However you reach the 80% LTV limit, the next step is to request a PMI cancellation from your lender. A cancellation request is usually given to your lender in writing. In addition to a cancelation letter, borrowers will also need to meet lender requirements before canceling their PMI. These requirements could include being current on your mortgage payments, having a good payment history on the mortgage, not having a second mortgage, and getting an updated home appraisal. Contact your lender to discover the specific requirements you’ll need to meet to qualify for early PMI cancellation.

Get a Home Reappraisal

If you live in an area with a rapidly appreciating real estate market, you may be able to reach an 80% LTV threshold quickly. For example, if you purchased a $400,000 home with a $40,000 down payment, you’d start your homeownership with a 90% LTV. Let’s say you pay an additional $10,000 towards the principal loan amount throughout the next year. However, let’s also assume your home value has increased by $100,000 throughout the last year. The original loan balance on the property would have been $360,000. You paid $10,000 of that loan throughout the first year, leaving a loan amount of $350,000. If the property value of your home is now $500,000, your LTV value is $350,000 divided by $500,000, which equals 70%.

In the above example, you start with an LTV of 90% when you purchase the home ($360,000 / $400,000). However, because of the rise in your home value and incremental mortgage payments, you quickly surpass the 80% LTV threshold. After only paying $10,000, you’ve already reached a 70% LTV. When a home’s value increases, it increases one’s home equity. Simply owning a home in a home value appreciation area can help end your PMI payments sooner than expected.

‍Furthermore, you can always increase the value of your home through home improvement projects. A renovated kitchen, a new porch, new windows, or an add-on room can all increase your home’s value; however, keep in mind that not all home improvements increase a home’s value.

‍Consider paying for an appraisal if you believe your home value has significantly increased or you’ve recently completed a home improvement project. As demonstrated in the earlier example, increasing your home value can be an effective way to reach the 80% LTV limit and end your PMI.  Be aware that the lender may require an appraisal because they will not use your personal appraisal, which would be an additional cost. 

Refinance Your Home

When interest rates are lower than the interest rate on the current mortgage, many people choose to refinance their homes. Refinancing can be a good way to get better terms on your mortgage. A refinanced mortgage will often have lower interest rates and lower monthly payments. Furthermore, refinancing may eliminate your PMI if your new mortgage has an LTV of less than 80%.

‍Consider the potential savings and costs of refinancing before moving forward. Refinancing will require new closing costs and fees. If applicable, also consider the potential savings gained in refinancing by no longer paying PMI.

‍Some loans have a ‘seasoning requirement’ before a homeowner is allowed to refinance. This stipulation requires one to wait a certain period of time before they’re able to refinance the mortgage loan with that lender in order to remove PMI through a refinance. Check with your lender to see if your lender necessitates you meet a seasoning requirement before refinancing. If so, this may prevent you from removing your PMI through a refinance with that lender. You may, however, be able to refinance with a different lender and remove PMI if you meet the requirements for not having PMI.

Your PMI Rights Under Federal Law

Thankfully, homeowners have certain rights they’ve been awarded through the Homeowner Protection Act. This act is designed to protect homeowners from the inability to drop PMI when required. Under these federal protections, you have the right to cancel your PMI once you meet the equity thresholds. As discussed earlier, those thresholds are 78% LTV for an automatic cancelation and 80% for a borrower-requested cancelation. In either case, your mortgage loan payments must be current at the time of cancellation, and other requirements may apply.

The way lenders handle PMIs varies from lender to lender. However, the Homeowner Protection Act ensures all lenders meet basic PMI cancelation requirements.  Ask your lender about their PMI rules and schedule. There may be specific PMI expectations or requirements unique to your lender. 

How Much Does Cancelling PMI Save?

Buying a house is expensive. There are many fees when applying for a mortgage loan and closing on the mortgage loan. One of those fees is a PMI if your LTV is above 80%. Compared to all the other expenses, PMI premiums may seem small. Still, eliminating this expense will help you save money on your monthly mortgage payments.

Furthermore, PMI costs vary from mortgage to mortgage. Your potential savings could be sizable in some cases and minor in other cases.

Removing PMI on Conventional Loans

On conventional loans, you’re likely paying PMI if your down payment is under 20% of the total market value of the house. To end PMI on these loans, simply reach an LTV value of 80% and request a PMI cancellation from your lender. Furthermore, if you reach an LTV value of 78%, your PMI should automatically cancel as long as your mortgage payments are current.

Summary

PMI is a cost many homeowners want to remove. If you want to cancel your PMI, you need to build up at least 20% equity in your home. You meet this equity limit through a large down payment, consistent mortgage payments, a rising home value, or refinancing. If you can cancel your PMI, you stand to save money on the life of your loan.

To learn more about your home financing needs, contact Wesley Mortgage today!

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