There is nothing worse than paying money for nothing. Sometimes, that’s exactly what private mortgage insurance, or PMI, feels like. It wasn’t doing anything for my family. It was just a fee we had to pay-every month.
So obnoxious.
It was especially irritating since we were expecting our fourth child and my husband was contemplating returning to graduate school-both expensive endeavors. It was time to economize and after searching through our budget, PMI became family enemy number one.
It was time to give it the boot.
Purchasing a Home With the Potential for Quick Equity
We had bought our home just over two years ago. Before the purchase, I had been eyeing the property for several months. It was in one of the best neighborhoods in our town where foreclosures were relatively uncommon even during the national real estate downturn. But still, the house had been sitting empty for nearly two years.
A quick walk around the property with our noses to the windows revealed the previous owner’s disregard for the property-dishes were still in the sink, mail was on the counter, trash on the floor and there were some interesting interior paint choices. But it was also apparent that there was nothing seriously wrong with the home.
When it was finally foreclosed upon and put on the market we were ecstatic but guarded in our enthusiasm. It was a closed bid situation. We put in an offer of $130,200 (about $10,000 above asking price, still far below other homes nearby) and waited. News came that it was ours!
How We Ended Up with PMI
One problem remained-we only had a 5% down payment.
We already owned a home that we had put a lot of time and money into remodeling and we didn’t want to sell while the housing market was so poor. We only had a modest mortgage on the property. A small mortgage meant we would be able to rent it out for several hundred more than what the mortgage payments were.
The downside was our equity stayed with what would now be an investment property and our funds for our new house were limited (especially considering that we kept several thousand in reserve for necessary remodeling).
We purchased the new home, like so many other people do, with private mortgage insurance. The good news was we had excellent credit, so this would help reduce our PMI payments.
How Much PMI Was Going to Cost Us
As it tuned out, we would be paying $60.81 for a grand total of 95 months just for the luxury of not having a larger down payment.
Not ideal, but we felt it was the best thing given our current situation. We also had it in the back of our minds that there was a good possibility of being able to stop PMI early.
Increasing the Property’s Value
Well, after cleaning up mouse droppings, ripping up every scrap of carpet, painting every wall and resurrecting the landscaping, our home looked and felt 110% better.
This increased the value of the property considerably. Also in our favor was a slow but steadily recovering real estate market.
We knew our lender would not consider dropping the PMI until we had owned the home for at least two years. We also knew we didn’t want to refinance to get out of PMI as our loan was at 3.125%, so we waited.
Two years after the purchase we knew we could apply to have our PMI removed IF the value of the property had increased enough.
We watched our local real estate market and specifically noticed that homes in our immediate neighborhood were not selling for less than $180,000, although usually they sold above the $200,000 mark. Using a conservative appraised value of $180,000 along with the almost $120,000 we still owed on the house left us with less than a 70% loan-to-value (120,000/180,000=66.7%). Banks like to see something under 80%, so we felt confident that we could qualify for PMI removal.
Time to Act
A quick phone call to our loan servicer informed us that we could in fact drop the PMI if we paid for an appraisal and the value came in high enough. The appraisal would cost us $400. A quick calculation revealed that it would take seven months of PMI payments to make the appraisal cost worth it. We weren’t planning to move any time soon so we confirmed that we would like to proceed. The loan servicer ordered the appraisal and we were on our way to lower monthly mortgage payments.
The Waiting Game
It took about a week for the appraiser to contact us for an appointment, another few weeks for him to come view our home and another several days before we got an appraisal. $204,000. That was the value. Whoohoo!
Well, that was the quick part. Of course the servicer took their time processing the whole thing, which wasn’t done in time for our next scheduled monthly payment. Sooooooooo….all in all, it took us a few months from the initial call to the loan servicer until our PMI payments were dropped…FOREVER!
It wasn’t a short process, but it was, in fact, very easy.
Saving Money Every Month!
In the end we made a grand total of 30 (if we had gotten on this earlier we could have shaved a few of those off) PMI payments, amounting to $1,824.30.
If we had done nothing, we would have made 95 PMI payments totaling $5,776.95!
For those of you wondering, even after accounting for the $400 appraisal we still saved a grand total of $3,552.65.
Not bad for a couple of phone calls, don’t you think?
Are You Ready to Rid Yourself of PMI?
The very first thing you MUST do is contact your loan servicer-that’s the company you pay every month. There are many different situations and different loans to go along with them. Some loans you will simply have to refinance to escape PMI. If you have a conventional loan, like we do, the process is pretty straight forward. No matter what your situation is, it will help a GREAT deal if you have made all your payments on time.
If your loan servicer indicates that they will not remove PMI, ask them if there is a possibility of removal in the future. There may be things you can do to improve your chances later on.
If an appraisal is needed, ask what value the appraisal needs come in at. Then, make sure your home will appraise for that value BEFORE it is ordered. You don’t want to spend hundreds of dollars on an appraisal only to find out that new pool didn’t add to the value of your home. It is probably helpful to assume you have an inflated view of how much your home is worth.
PMI Is Helpful, but You’ll Be Glad When It’s Gone
When you have contacted your loan servicer and have a clear idea of how to drop your PMI payments, it’s time to go for it.
Private mortgage insurance can be a great tool to get into a home, but after it has served its purpose it’s time to say buh-bye!
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