Pay No More

Kevin Thompson

IF YOU PUT DOWN less than 20% on a conventional home loan and you’re still paying private mortgage insurance (PMI), do what I did: See if you can get those pesky PMI payments eliminated.

I purchased a home in September 2017 for $341,000. The interest rate was near 4% and I put down roughly 10%. Why not put down 20%, so I could avoid PMI? My thought: If I can borrow money at an interest rate below 5% and get a reasonable rate of return elsewhere, why not make a smaller down payment and invest that extra money instead?

After I bought the house, interest rates dropped even further, so in 2019 I refinanced my home loan to 3.25%. Yes, that was only a 0.75-percentage-point reduction in my mortgage rate, versus the common advice to refinance only if you can get a full one-point reduction. Still, I went ahead, believing rates couldn’t fall further. Boy, was I wrong. Rates fell to under 3%. I thought about refinancing again, but the cost wasn’t worth it.

All during this time, I was paying PMI. PMI is a type of insurance that’s required by mortgage lenders if your down payment is less than 20% of a home’s purchase price. PMI protects the lender against loss if you default on your mortgage. My monthly PMI was just $116, but it still felt like I was throwing away money.

As you know, home prices have gone up considerably, and I began to realize that I could get rid of that PMI payment by getting my home’s value reappraised by the lender and then asking that PMI be removed based on my new loan-to-home value ratio.

Initially, I received a notice of rejection from the lender, which said it didn’t have sufficient information to act on my request, so I called. It turned out that my PMI removal request wasn’t rejected, but was actually going through the approval process. The whole process was surprisingly quick.

Want to get rid of those PMI payments? Try taking these steps:

  • Start by contacting your mortgage lender to see if you’re eligible for PMI removal.
  • If you’re eligible, send a letter that lists your loan number and requests the removal of PMI. Be sure to sign and date the letter. I would also advise including two or three different ways to reach you. You don’t want the lender to use the fact that it couldn’t contact you as a reason to reject your request. In addition, specify any home improvements you’ve made, with the date and cost of those improvements.
  • The lender will order an appraisal or BPO, short for broker price opinion, to value your residence. The appraiser or broker will then come by and take pictures of the front and back of your home, each room and any improvements you’ve made.
  • After the broker or appraiser sends in the valuation, wait perhaps five business days and then call the lender to check on the status of your request.

One caveat: This process is only available with conventional loans, not Federal Housing Administration mortgages. The FHA is more stringent, and in most cases won’t remove the PMI unless you meet certain standards put in place when the loan was originated. Also, PMI rules can vary among lenders. My lender required a 70% loan-to-value ratio, rather than the traditional 80%, to remove PMI. My lender also used my home’s current market price, while other lenders may insist on using the original purchase price.

Kevin Thompson is a former Major League Baseball player and founder of 9Innings Capital Group LLC. He is a Certified Financial Planner® and Retirement Income Certified Professional®. Kevin graduated from the University of Texas at Arlington in 2011 with a degree in finance. Check out his earlier articles.

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