What Is PMI?

PMI, or Private Mortgage Insurance, is required by banks when you finance more than 80% of the value of the home.  This protects banks in the event homeowners foreclose and the bank cannot sell the house for enough to pay off the loan.  Private Mortgage Insurance is expensive, typically adding over $100 to your monthly mortgage payment.

How To Avoid Paying PMI?

One way to avoid paying private mortgage insurance is to put down at least 20% of the purchase price when buying  a home.  For example, assuming you are looking to buy a $125,000 starter home you would need to save more than $25,000 to put down on the home and finance the remaining $100,000.  This way your loan-to-value ratio on the home would be less than 80%, assuming the house does in fact appraise for more than $125,000.

If you already own a home, and are paying for PMI, the only way to cancel your policy is to drive down the loan balance below 80% of your home’s value.  That might be difficult in the current market where loan values have declined sharply in some areas.

Check sites like Zillow.com to look at recent real estate sales in your area.  If it looks like houses in your market of a similar size and location are going for enough to cancel PMI, it might be worth it to schedule an appraisal.

Contact your mortgage company and let them know you are hiring an appraiser in an effort to prove your loan-to-value ratio is under 80%, and you are interested in canceling PMI.  I recommend hiring an independent, certified appraiser because the bank’s appraisal team will have the bank’s interest in mind, and may intentionally undervalue your home.  If the appraisal proves your theory correctly, and you owe less than 80% of the appraised value of your home, submit a copy of the appraisal to your mortgage lender and follow their steps for dropping private mortgage insurance.  It will only take a couple months of paying premiums to make up the costs of the PMI premiums.