Canceling PMI Insurance
Ask Phyllis: a blog series of frequently asked real estate questions.
Dear Phyllis,
I have been enjoying your advice for years and have yet to see this topic addressed. My daughter and her husband bought their house in 2019. We gave them most of their down payment so they could put 10% down. They are paying about $250 extra each month for the mortgage insurance. Zillow shows that their home value has increased by more than 20%, and it seems that they should no longer be required to have this insurance. How would they go about canceling the PMI insurance?
Deborah
Dear Deborah,
This is a very timely question! Private Mortgage Insurance (PMI) protects the lender if the borrower defaults on their loan. Yet it offers no coverage to the buyer and should not be confused with mortgage protection insurance which pays off the mortgage if the borrower passes before paying off their loan. PMI allows borrowers with smaller down payments the opportunity to obtain a loan. The smaller the down payment, the riskier the loan is to the lender. The lender offsets this risk with this insurance.
For borrowers, such as your daughter, who purchased a home with less than a 20% down payment, the lender likely added Private Mortgage Insurance (PMI) to their loan. As you know, this insurance increased her monthly payment.
Canceling PMI Insurance
Equity is the difference between the value of the home and the amount of money owed on the mortgage. Most home buyers who purchased in the last several years have experienced rapid price appreciation, and their equity has increased. Contact your daughter’s real estate agent to have them prepare a Market Evaluation, which will be more accurate than Zillow’s Zestimate.
As soon as homeowners have achieved at least 20% equity in their home, they should contact their lender. Typically, the lender will require that the borrower pays for the lender’s appraisal. Have your daughter’s Realtor provide comparable properties (comps) for the appraiser. A comp is a recently sold home in your neighborhood that is similar due to condition, features, square footage, lot size, etc.
Once the appraiser validates your daughter’s 20% or more equity, the lender should remove this insurance.
You might enjoy: Buying a flip
I know someone who bought her home during the height of the buying frenzy. She paid much more than asking price to secure her offer but that left her with less than twenty percent down. However prices rose so quickly she was able to shed her PMI in less than a year!!