Why PMI for this transation?

Question

In October 2021 my wife and I purchased the home we were living in from my father whom owned the home since 2016. When we did the purchase the values where obviously high, so we didn't put any money down on a conventional loan via Gift of Equity from my dad for the required amount, but it wasn't 20% of the loan so we have PMI attached to the loan. My confusion is this, the lending docs have the Private Mortgage Insurance doc that list 3 values "Loan amount, Purchase price, and appraised value". My understanding of some investing principals is that if you buy a home for say $100k, use the BRRRR strategy, refinance with a lender and the apprised value goes to $200k, wouldn't that, wouldn't you be able to take out like $60k, pay the original $100k off, and still not need PMI because the Loan to value ratio is at least 80%?

The other reason this is bothering me is because in October 2023 we took a HELOC out of $75k so the value of the home was for sure close to $400K and we only owed maybe $240k then. So is PMI applied based of the PP Vs. loan, or the value Vs. loan? If some lenders could help me out with better understanding that would be great. The lender is Wells Fargo, the amount we pay in PMI is ridiculous compared to our primary now. $206 PMI for Wells Fargo on a $268k loan compared to $165 PMI on $450k on our primary we purchased with Freedom Mortgage in 2024 with 5% down.

Patrick Roberts · Answer

In a purchase transaction, the lender uses the lower of the purchase price and the appraised value as the basis for the loan. So if the property appraised for more than what you purchased it for from your dad, then the purchase price was the basis for the loan and PMI.

PMI should automatically cancel once the loan balance has been paid down to 78% LTV of the original deal terms. If you feel the property has appreciated more and youre in the money at present to drop PMI, you should be able to request PMI cancellation now, which will likely require a new, up to date appraisal. Your servicer would be the first place to call to start this.

If a full appraisal was completed within the last four months for the heloc, you can ask that they consider it; I doubt they will use it. You'll likely have to get a new appraisal if you have not yet reached 80% LTV of the original purchase price.

Also, having a junior lien may cause some issues. Not 100% sure on this, but I've heard of people having problems.