Why pay fees and interest that you don’t need to! Most people don’t truly understand all of the different fees making up their monthly mortgage payment. Below I have outlined how I plan to save $97 per month by spending $150. I will take a month and a half payback any day!
When I purchased my first ever home, I decided to use a FHA loan with a 3.5% down payment. One big benefit of getting a FHA loan is the low down payment needed to purchase the home. The downside of purchasing a home with a FHA loan becomes having to pay Private Mortgage Interest (PMI).
What is Private Mortgage Interest? PMI is an additional cost the lender charges you in case of a default. This helps to protect the lender as they feel you are more likely to default on your loan if you only put 3.5% down. So what did this mean for me on a loan of $280k? An additional $97 per month in PMI cost. Ouch…that money could definitely be doing something more than being gone forever.
How can you get rid of PMI? After calling my lender, there were two options provided to get rid of PMI.
- Option 1: required 20% equity in the home. To have 20% equity built up in the home, I would need to have $58,400 paid principal. Yeah, no, 🙂 I am not even close to that.
- Option 2: having a minimum of 75% or lower Loan To Value (LTV) in my property. In simpler terms, this means my Loan Amount divided by the Value of the home must be less than 75%. I decided to go with option 2, and here is why.
Based off my lenders website, they estimate I have built up $90k in equity. With that, my loan amount is $263,183. I purchased my house for $292,000; therefore, if I have an estimated $90k in equity, this should mean my home is worth $262,183 (current principal owed) + $90,000 (current equity estimate) = $353,000.
The only issue now is the fact I purchased the home at $292k and the current estimated equity build up is fictitious (for now). What can I do to “realize” the equity? The only way to make the equity “real” is by getting my home re-appraised and for the appraiser to come back with a home estimate of $353,000 or greater.
Action Steps Taken:
Here are the actions I took to make this happen:
- Called my lender to have them schedule an appraiser to come out to get my home re-appraised
- Put together a one pager printout for the appraiser, so once they get to my home they understand the exact price I am trying to get the home appraised for. THIS IS HUGE! From people I have spoken to, if you go in with factual data behind properties sold in your area that are similar to your property AND you give them the number you are looking to get to, the odds of your home being appraised for that amount exponentially increases.
3. Now it is time to print out this one pager and have the appraiser to come by the house to hopefully have everything re-appraised to the $350,910 needed.
I should know back in a week from today (6/29/19) whether I received the appraisal value I was looking for. Ultimately, there are two outcomes that can happen:
- Scenario 1: I receive an appraisal value of $350,910 or greater and my lender will automatically remove the PMI. This will immediately save me $97 per month at a low cost of $150 to have my home appraised
- Scenario 2: The appraiser comes back with an appraisal amount of less than $350,910. In this scenario, I have two options. Let’s say the appraiser comes back and values my home at $348,910. Option 1, I can do nothing and wait for a few additional mortgage payments until I have paid $2k more towards principal. Based off my principal paydown in each payment, this would take 5 months and I would have lost out on $485 worth of savings. Option 2, I can make a one-time payment towards the principal to get to the exact equity needed. In this scenario I would be required to make a principal payment of $2k. At that point I would have the required equity built to get rid of PMI. Now my total cost comes to $2,150. At a savings of $95/month, this would payback in 22 months. Still not bad when you look at good return rates and ROI.
I will post after the appraisal comes back to detail out the course of action taken based off what the appraisal comes back with.
- FHA loans are great for first time home buyers, but they do come at a cost. That cost is having to pay Private Mortgage Interest. This cost is never recouped.
- Understand the breakdown of your mortgage payments and any fees or unknown costs your lender doesn’t want to tell you about.
- If you do have an FHA loan, and your home has appreciated in value since purchase, call your lender to see if there are options to get rid of PMI. You might be surprised how easy this can be if you have the proper equity unrealized.
This article was a lot more detail and requires much more action and understanding of what to do versus past articles. For that reason feel free tor reach out to me in the comments or send me a direct message on IG: @TheYoungRetireeBy33 if there are any questions you have about your current situation. Hope you enjoyed the read!
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