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Save Big By Canceling Private Mortgage Insurance Print
Monday, 21st May 2007 (by J.D.)This article is about House and Home, Money Hacks
When you buy a home, you learn there are many little costs that accumulate over time: mortgage, interest, insurance, utilities, maintenance, etc. Many of these are recurring expenses about which little can be done. There is one expensive, however, that homeowners can eliminate, and should do so as soon as possible.
Lenders require private mortgage insurance (commonly called PMI) from homebuyers who take out loans that are more than 80 percent of a property’s value. If you buy a home using a down payment of less than 20 percent, you’re usually required to carry PMI.
OmniNerd recently published an article that describes how canceling private mortgage insurance early can save money:
If you pay PMI, be aware of the figure used by your mortgage company to determine when to allow PMI cancellation. Take whatever reasonable actions you can to cancel your PMI early, including appraising your home, paying additional principle, and contacting your lender promptly with the appropriate correspondence. Doing so could save you thousands.
If you think you may be paying PMI, check your most recent mortgage statement. It’s worth your time to investigate. If the value of your house has risen over the past few years, you may be able to save money by canceling the payment. In addition to the OmniNerd article, you can learn more at the FTC web site.
[OmniNerd: Cancel private mortgage insurance early to save money]
May 21st, 2007 at 1:50 pm
Being able to cancel PMI by obtaining a new appraisal is often not an option. Many mortgage companies only allow the PMI to be cancelled based on the original appraisal.
May 21st, 2007 at 2:25 pm
Tim L is right. The appraisal matters if/when you refinance, but not until then. At least, that’s what my mortgage broker friend just told me the other day.
We’re actually getting LPMI on a house we’re buying to rent out. That’s lender-paid PMI, which has some pros & cons. Pro: while PMI isn’t tax-deductible, LPMI is. Con: you can’t cancel it when you hit that 80%/20% mark. But I figure we’ll end up refinancing by then anyway, so no big deal. We’re going with LPMI because it gives us a lower monthly payment, which is helping the house be cash-flow positive.
May 21st, 2007 at 2:43 pm
What’s the rationale behind waiving PMI if you get a HELOC? Shouldn’t getting more debt be bad?
May 21st, 2007 at 2:53 pm
Okay, I think I answered my question, sort of:
http://www.aesmortgage.com/equity_faq.htm
Bizarre, but then I’m an engineer and not a finance guy.
May 21st, 2007 at 3:00 pm
Oops. I wasn’t clear there. I’m not advocating that people get HELOCs to avoid PMI. I meant to say that if people *do* get second mortgages, they probably won’t have PMI to worry about. Hmmm. Even that sentence doesn’t sound right. I removed the sentence from the post. I didn’t mean to confuse the issue.
May 21st, 2007 at 3:33 pm
Richard, it sounds like that site is calling the smaller loan of an 80/20 financing arrangement a “HELOC”. Maybe that’s common parlance but I’m with you, it doesn’t really have anything to do with equity.
I agree with the larger point of the post, that it’s good to drop PMI as quickly as possible.
I’m inclined to think that 80/20 and similar arrangements, which are touted as the way to avoid paying PMI at all, are popular with lending institutions because ultimately you pay off equity more slowly with that arrangement (due to the higher rate on the smaller second loan), and the balloon payment on the second loan means that even people who do stay put in their home for the long run will eventually refinance.
May 21st, 2007 at 3:47 pm
Following up to say to Tim L and Rich Schmidt, the policy for cancelling PMI varies by lender.
We were able to drop PMI on our first house (mortgage held by Washington Mutual) by having it appraised and, IIRC, paying a fee, ca. $150 for processing or somesuch, after the loan/PMI had been in effect for two years. We did so the very microsecond we were eligible and in our rapidly appreciating market easily cleared the 80% LTV hurdle.
Chase held the mortgage on our second house and had a similar policy–two years and then re-appraise, and pay a similar fee. It was also possible to inititate proceedings for dropping PMI sooner than that, but required a lot more justification: documentation and receipts of improvements on the property, and explicit descriptions by the appraiser about the gain in value for each improvement.
We bought the house as a fixer and had made many improvements, large and small, and in our (still) rapidly appreciating market figured that we’d gained enough equity after one year to hit the mark. And we were right–but we decided to refinance with a different lender that we like better, rather than try and jump through those hoops, and in the end keep sending our money to the evil Chase.
FWIW Chase didn’t make these rules easy to find, and other information in their materials would give one the impression that one could only drop PMI by paying down to 80% of the original appraisal. I had to explicitly inquire to get information about their policy and all the details.
May 21st, 2007 at 4:07 pm
Do not buy a house if you don’t have at least 20% for a downpayment, IN CASH.
ONLY get a mortgage loan that is a 15 year fixed rate.
NEVER EVER EVER!!! get an ARM or interest only loan, this is STUPID.
Do not buy a house if that 15 year fixed rate mortgage payment is going to be more than 25%.
Anything else sets you up for foreclosure. The real estate mortgage industry is selling a lot of people 30 and now 50 year mortgages, on 80/20 split, often with ARM/balloons, or interest only loans, and as a result, people are going broke, headed for foreclosure and bankruptcy and divorces. This kind of thing is ALL OVER the Dave Ramsey show, and his rules (summarised at the start of this comment) are there for a reason.
Don’t be stupid, and stop paying stupid tax in ARMs and interest only loans. Dont let your “friends” pressure you into making a decision to buy a house you cant afford.
May 21st, 2007 at 4:09 pm
And if your credit score is already shot from making stupid choices like breaking Dave’s rules, but you’ve made a turnaround, you can still get a mortgage with a decent fixed rate through a mortgage lender that does MANUAL UNDERWRITING. They will look at your whole financial picture, not just the bleedin’ FICO score.
May 21st, 2007 at 6:45 pm
joshuat - I was thinking that’s sounds just like Dave before you mentioned him. I wish I knew this before I got into my ARM with PMI. I can’t say I’d recommend getting a loan with PMI or an ARM. It’s crazy. But people are going to loans with PMI anyway, they should at least have some decent advice.
May 21st, 2007 at 8:20 pm
OK, Joshuat, I can understand the reasons not to get an ARM or interest-only loan… but why the insistence on 20% down and 15-year mortgages? My wife and I live far beneath our means and have never put more than 10%-15% down on 30-year fixed-rate mortgages. They’ve always been well within our budget (not stretching ourselves to buy more house than we can afford). So to say that “anything else sets you up for foreclosure” is just plainly not true.
I’m not even sure what you meant by your 25% sentence. I’m thinking perhaps you didn’t finish it… 25% of what?
May 21st, 2007 at 9:34 pm
[...] at Get Rich Slowly on Canceling PMI. This ties in well to my PMI vs. 2nd Mortgage calculator from earlier this [...]
May 22nd, 2007 at 6:14 am
I think he meant the mortgage payment should be no more than 25% of your take-home pay.
May 22nd, 2007 at 6:39 am
I agree with Rich Schmidt. I bought a house with a 30 yr. fixed mortgage and not quite 20% down. But the payments are well within my budget and I still have money for various home improvement projects. I think the main thing is to really understand whether or not you can afford the payment comfortably, no matter what kind of loan you get….
May 22nd, 2007 at 8:22 am
Rich Schmidt and DaveD:
You never get a 30-year mortgage because you are giving away tens of thousands of dollars (probably hundreds of thousands!) to your lender for nothing in return.
I did a write-up on this recently here: http://money.kevingunn.org/index.php?/archives/2-Mortgaging-your-life-away-Thoughts-on-housing.html
(Hopefully that link worked — I don’t know what html this comment system will accept!)
The long and the short of it is that the difference between a 15-year and 30-year mortgage for a $200K loan comes to almost $150K in interest payments. You can go to the link to see the exact calculations and assumptions.
That’s $150K that could be feeding your retirement instead.
May 22nd, 2007 at 9:35 am
Kevin, I understand the value of shorter mortgages, less interest paid in the end, etc. For us, this is working. We already save 20% of what we make and give 20% away. Living on 60% of our income, I’m not too worried about it.
May 22nd, 2007 at 3:16 pm
Kevin:
I was intrigued by the comments I’ve seen over the 15 year versus 30 year fixed mortgage, so I ran the numbers a few times and it seems to me are two distinct cases here:
1. Person can only pay the 30 year-fixed within their allotted budget.
2. Person has the ability to choose between a 15 year-fixed and a 30 year-fixed and can pay either one within their allotted budget.
For Case #1 it would be much better to save up the money to reduce the principal in order to reduce the 15 year-fixed payment to be affordable. On the 200k mortgage I estimated this to be about 7 years. So after 22 years you’re done with the mortgage, as opposed to 30. I can see how this is feasible.
Case #2 depends entirely on what is done with the difference in payment. For the 200k mortgage this difference is $5475 a year. Take this $5475 and invest it every year and with a paltry 6.25% annualized rate of return you’ve broken even with the 15 year-fixed, assuming after the 15 year was done you invested all 20252′ish and achieved equal rate of returns. Yes, you’re paying more in interest, but you’re making that difference up by investing and getting a heavily compounded return on the money.
Considering over 10 year and greater periods the S&P returns an annualized rate of about 12.3%, the 30-year fixed seems to blow the 15-year out of the water.
February 12th, 2008 at 5:15 pm
After 2 years with GMAC we were finally allowed to “request” our PMI be dropped. We had to jump through alot of hoops to make them happy. We had to pay for a new appraisal which showed a 35% increase in value after 2 years (we live in a nice coastal area). We were easily able to show we had the required % of equity. I spoke to many people in the same department who all had a different opinion on what would be necessary. Talk about the runaround!! But after satisfying their requirements it finally happened and we got a refund check from the escrow account.
March 31st, 2009 at 1:17 pm
Kevin nailed it- at least my reason for the 30yr vs. 15yr. Previous articles on this very system advocated the same [rationale for not paying off a mortgage early if your interest rate was under about 8%].