It is official! Finally! I was able to get rid of my $95 per month PMI (Private Mortgage Insurance) payment on my 3.5% down home loan.
I couldn’t be happier with eliminating an expense that adds no value to my life. PMI is definitely one of those.
What is PMI?
For some of those who might not know, let me first explain what Private Mortgage Insurance (PMI) is. Private Mortgage Insurance is something you pay on top of your mortgage when you put less than 20% down. This extra payment helps “protect” the lender as you have a higher rate of defaulting on the loan. To be clear, this money doesn’t go towards the pay down of your principal payment. This is an additional payment you don’t recoop. I don’t believe this statement to be true, but this world isn’t fair!
How I Got Rid Of PMI In 3 Years?
Now comes the fun part. Six months ago, I didn’t have a great understanding of what PMI was. Once I finally learned what it was I went on a quest to try and better understand what my options were to get rid of PMI.
There is no better way to do this than call your loan provider. So that is exactly what I did. My home loan provider is Mr. Cooper. I was shortly after transferred to the PMI department. Yes, that is right, they have a separate department entirely for PMI.
I explained my situation to the PMI person (like I knew what I was talking about) and asked what options were available to remove the PMI. This is where things got interesting.
The individual on the other end of the phone told me there were three different ways to get PMI removed:
- I would have to have my principal balance owed to be at a 80% Loan to Purchase Price. This means, for simplicity, if I bought the home for $100k, my principal balance would have to $80k or less.
- If number one wasn’t true, then I could pay, in cash, the difference to get to a 80% loan to purchase price. To keep numbers simple, if I put 3.5% down on a $100k property, my loan principal would be $96,500. To get to an 80% LTP I would need to pay $16,500 in cash on my principal balance.
- I could get the home appraised based off a BPO and if my principal balance was less than 78% of the new appraisal price then the PMI would be removed. This would mean if I owed $78k in principal but the home appraised for $100k then the PMI would be removed.
Perfect. I know knew the different options I had for PMI removal. When analyzing the different options, I wanted to figure out what would have the largest ROI (return on investment).
Analyzing the 3 options
Option 1: This isn’t really an option but more of a binary yes no. Since I put down 3.5% and I was 3 years into my debt payoff, I was far away from this being true. Option 1 is officially axed.
Option 2: In my particular scenario I put down 3.5%. I purchased the property at $292,000 meaning I paid $10,220 towards principal. That means my remaining principal balance started at $281,780. Three years into the loan and my balance was roughly $270,000. To have an 80 percent loan to sale value, my principal balance would need to be $233,600. Well….way off there. This would cost me $36,400 to get rid of PMI in cash. The return on investment would be almost 32 years!!!! That is insane and there is no reason to pay that amount of money to get rid of a $95/month payment.
Option 3: Down to the last and final option! I could get an appraisal to see what my homes current value is. Based off the principal balance being roughly $270,000, I would need the home to appraise at $346,153 to have a 78% loan to value (LTV). To get this number, I divided my principal balance ($270,000) by .78.
Now that I knew where my appraisal needed to come in at, I started looking at prices for similar homes in my area. I started seeing my home should come in around that price so I decided to move forward with getting an appraisal!
A few weeks later, I had the appraisal done and before I knew it, I got a notification from my lender that my payment price would drop by $95 per month.
I am all for spending on things you enjoy in life, but paying $95/month and never seeing it again was a waste. Not bad to be able to end this expense with little effort put in on my side.
- PMI is a big part of how lenders protect themselves when taking on loans where the individual taking out the loan puts low money down.
- If you are paying PMI, call your lender to find out what options you have to get rid of it. They are very open to having the conversation. Especially if you always pay on time!
- Cut expenses that you are wasting money on and don’t bring you any happiness! This expense was exactly that! I would never see this money ever again as it is not added to your principal payment.