Dropping PMI with appraisal?

Question

Anyone ever have any luck getting rid of PMI early with an appraisal?  Here's my thought.

We just bought a house and it appraised above what we paid, my math shows that with our payments (factoring in front load interest), and an appreciation rate of just 1.4% a year we'll be at a 80% LTV in 2 years.  If I redo the upstairs bathroom and do bi-weekly payments that should definitely be enough to get me over that threshold.  Thoughts?

Tom Smith · Answer

I bought my first home (duplex) almost 2 years ago with a state program "Mass Housing" that allowed only 5% down (3.5% for SFR).  It had no PMI but had a high rate of 5.125%.  I just closed this past Monday into a new loan without a problem.

My home appraised just above 80% LTV.  I have been lucky with good appreciation!

Sam White · Answer

Just a thought for your future owner occupant purchases.  There is the option to pay off the PMI at closing.  You avoid all interest on it this way. If you strategically close at the end of the month, you will get the tenant's deposit at closing and then your first rent check that week.  Pay your PMI in full up front (mine was ~$2,500 and would have totaled nearly 8,000 paid until 80%LTV) then just pay yourself back with the cash at closing and first months rent.

The benefit of closing at the end of the month is you typically wouldnt have your first mortgage payment until over a month later and can recoop your funds.

Jacob Edmond · Answer

My FHA loan on my first house, the PMI goes away only after I have been paying for at least 5 years AND I am under the 80%. I have to hit both, but when I do they are supposed to automatically cut the payments to PMI. I won't hit the 80% with the regular payments until like 7 years, so when I hit 5 years I'll probably make a large payment just to get rid of it as soon as possible.

new FHAs with 3.5% down, you can never get rid of PMI without refinancing.

Eric P. · Answer

My lender is Wells Fargo, I was told this is an option without having to refinance.  I wish I was in the 3s.  We were originally quoted 3.875 but we bought our house right as rates started to jump so we had to lock 4.125 once the paperwork was signed.  Disappointing cause it cost us an extra like $50 a month, but it quickly went up to 4.3 and doesn't look to be letting up much any time soon.

With any luck refi will be an option and maybe we can scoop up that 3.875 as planned.

Wayne Brooks · Answer

Nope, talk to your lender. Conventional, usually a five year minimum to use the appraised value, within in that five years, loan balance needs to be less than 80% of original purchase price.  FHA, less than 10% down PMI is for the life of the loan, 10% or more down, 11 years.

Frank Jiang · Answer

You'll want to call your lender and confirm their exact rules for dropping PMI.  My lender requires 75% LTV instead of 80% if you go the reappraisal route within the first 5 years.

Keep in mind the cost of the appraisal and the subsequent increase in your property taxes when considering whether or not doing this is a good idea.

Dan Mackin · Answer

Most lenders I have talked to will make you refi to get out of the PMI. They only do LTV based on the original appraised value. I would check with your lender on the specifics before betting on just a new appraisal making PMI go away.

Justin Thompson · Answer

I've seen two options... If you have 80% LTV they will order an appraisal and "modify" your current loan to remove the PMI. Some banks though I've heard instead of a loan modification they make you refi to remove the PMI. My wife bought a house long ago that had PMI, we went to refi to remove it, but her interest rate was so low, that the new interest rate even removing the PMI was higher than currently paying with PMI. So we decided to just leave it as is till we sold the home.

So depending upon your interest rate, say you have a 3.5% with PMI, and refi'ing it in 2 years has a interest rate of 4.75%-6% (just assuming higher interest rate to make a point) it may not beneficial to refi it if the payment is equal or higher. Best move would be to try a loan modification when the time comes.