How a Higher Home Value Can Help You Cancel Private Mortgage Insurance

If you bought a house with less than a twenty percent down payment, chances are you are paying for private mortgage insurance, or PMI. This is an extra monthly cost that protects your lender if you stop making payments, but it does nothing for you. The good news is that PMI is not permanent. You can get rid of it once you have enough equity in your home. And one of the most common ways to build that equity quickly is when your home’s value goes up. In today’s housing market, many homeowners are seeing their property values rise, which means they may be closer to canceling PMI than they realize.

First, let’s talk about what PMI really costs you. On a typical mortgage, PMI can add anywhere from thirty to seventy dollars per month for every one hundred thousand dollars borrowed. That means if you have a two hundred thousand dollar loan, your PMI could be between sixty and one hundred forty dollars each month. Over a year, that adds up to over a thousand dollars or more. That’s money you could be putting toward your mortgage principal, home improvements, or savings. So finding a way to drop PMI as soon as possible makes good financial sense.

The magic number for getting rid of PMI is usually twenty percent equity in your home. Equity is the difference between what your home is worth and what you still owe on the mortgage. For example, say you bought a house for two hundred fifty thousand dollars with a five percent down payment, so your loan was for two hundred thirty-seven thousand five hundred dollars. If your home’s value stays the same, you would need to pay down the loan to two hundred thousand dollars to reach twenty percent equity. That takes years of regular payments. But if the value of your home jumps to three hundred thousand dollars, you already have twenty percent equity because your loan balance is still two hundred thirty-seven thousand, and two hundred forty thousand is eighty percent of the new value. In this case, your equity is sixty-three thousand dollars, which is more than twenty percent. That could mean you are eligible to request PMI removal right now.

There are two main ways to get PMI removed using a higher home value. The first is an automatic cancellation. Federal law requires your lender to automatically drop PMI once your loan balance reaches seventy-eight percent of the original value of your home. But that is based on the purchase price, not the current market value. So if you rely only on automatic cancellation, you might be waiting years even if your home is worth much more today. The second way, and the one that uses a higher home value, is to ask your lender to remove PMI early. This is called a borrower-requested cancellation. You can do this as soon as your equity reaches twenty percent based on the current market value, not the original price.

To take advantage of a rising home value, you will need to prove that your home is worth more than it was when you bought it. That usually means getting a home appraisal. An appraisal is a professional estimate of your property’s value by a licensed appraiser. The cost is typically between four hundred and six hundred dollars, and you pay for it yourself. Some lenders have specific rules about what kind of appraisal they accept. They might require a full appraisal where someone comes to your house and inspects it inside and out, or they might accept a drive-by appraisal or a computer-generated value estimate. Check with your lender first to know what they require.

Before you spend money on an appraisal, make sure you meet the other conditions for PMI removal. You need to be current on your mortgage payments with no late payments in the last twelve months. Your loan must be considered a good risk, meaning you have not had a long history of missed payments. Also, you typically need to show that the property is your primary residence or second home, not a rental. And you must request the cancellation in writing. Most lenders have a standard form or letter they want you to use. Once you provide the appraisal showing your equity is at least twenty percent, the lender has a set amount of time—often thirty to sixty days—to process your request and stop charging PMI.

One important thing to keep in mind is that not all loans work the same way. If you have a Federal Housing Administration, or FHA, loan that was taken out after June 2013, you are stuck with mortgage insurance for the life of the loan if you put less than ten percent down. That is true even if your home value skyrockets. FHA loans have their own rules, and you cannot remove the insurance by simply proving higher equity. For conventional loans, which are the most common type, the early cancellation option is available. So check your loan type first.

Another point is that you do not have to wait for the appraisal to be perfect. If you suspect your home has increased in value, you can look at recent sales of similar homes in your neighborhood. Real estate websites and your local property records can give you a rough idea. If those figures suggest you have more than twenty percent equity, it may be worth paying for a formal appraisal. On the other hand, if your equity is only borderline—say nineteen percent—it might not be worth the cost of an appraisal because the lender might still say no. But if you are clearly above the twenty percent threshold, the appraisal fee is a small price to pay for years of PMI savings.

Also keep in mind that you can combine a higher home value with your regular mortgage payments. Every dollar you pay down on your principal increases your equity. So if you are making extra payments each month, you might reach twenty percent equity even faster. But the quickest route is often the rising value of your home itself. Many homeowners have been surprised to find that after just a few years, their homes are worth tens of thousands of dollars more than they paid. If that describes your situation, do not wait for the lender to contact you. Take the initiative.

In summary, a higher home value is one of the most powerful tools you have to cancel PMI early. It can save you hundreds of dollars each month and put that money back in your pocket. All you need is at least twenty percent equity based on today’s market value, a clean payment history, and a written request to your lender. An appraisal may be required, but the cost is often well worth it. So check your current home value, crunch the numbers, and see if you are ready to say goodbye to PMI for good.