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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:
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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just to be clear for all of the readers, this article is only about getting rid of PMI. The housing market has gone up and if you put less than 20% down, you may have the ability to rid your pesky pmi payment. I went through my steps in this article. As Mr Mcglynn stated, with riding home values come higher taxes. So at least get rid of one headache, if applicable , by removing PMI.
I’m not sure I understand the rationale for not putting 20% down during the original loan process. The $34,000 invested elsewhere was costing 4%. So if it was investing and getting a normal market return of 8%, the gain (8% minus 4%) would be $1360 annually. But the PMI was costing $116/month = $1392 annually. Why go through all the hassle to make nothing?
Great question. This article is not telling anyone to put less than 20% down. I am merely telling you my journey and how you can now rid yourself of PMI if you have yet to reach that 70-80 percent LTV.
As to why I didn’t put 20% down, The reasoning is a level of comfort. I wanted to have more than enough “liquid savings” on my balance sheet to cover the unexpected and untimely cost of things unforeseen, the black swan event. As we all have learned, no one expected Covid-19 to occur, and yea I do understand that we are speaking about a difference of 3 years. Be that as it may, I am a cautious investor and person by nature, hence having more than enough capital on the sidelines brings me a level of comfort versus having it stuck in an illiquid asset. Furthermore, there is an inherent “opportunity” of that capital when things may arise, for example buying a property or additional investment.
Just my thought, but again do not get this article confused as a guide to not putting 20% down.
Nice way to benefit from rising home values. On the other hand I heard yesterday that someone’s monthly payment increased $300/month due to their rising home value. The increased home value meant the escrow account-which pays property taxes- was underfunded.
Absolutely correct. Taxes and escrow is actually moving higher. Very important to understand the reflection of rising home prices in regard to your property tax, and saving money by taking advantage of rising prices will be key. Why pay the company money when you don’t have to! You are correct Mr Mcglynn
Thank you Mr Clements for another opportunity to bring an uncommon topic to a group.