Private mortgage insurance, or PMI, can add thousands of dollars each year to mortgage bills for those who were unable to make a 20 percent deposit.
And PMI feels like paying money for nothing, because it protects the lender rather than the homeowner, but it does allow for home purchases with less money down. The policy charges stay in place, month after month, until the owner’s equity in the property — the value minus the remaining debt — is at least 20 percent.
But there’s a catch. The value of the property, for PMI purposes, is what it was worth when purchased, rather than what it’s worth now.
Borrowers with conventional mortgages can request that PMI be dropped once they hit the 20 percent equity threshold, but they have to ask. Otherwise, PMI is automatically dropped once equity reaches 22 percent.
PMI payments vary depending on credit scores, and can be as high as 2 percent of the loan amount, each year, or a bit more than half a percent for those with very good credit. Even at the low end, those payments are a big expense.
In times when mortgage interest rates were steady or falling, the best ways to quickly get out of paying PMI included refinancing if a home’s value had increased. Sometimes, homeowners were able to both drop PMI and get a lower interest rate.
Those were the days.
When I bought my family’s first house in Pennsylvania the 1990s I had to pay PMI as part of my monthly mortgage bill. I refinanced just a few years after the initial purchase, got a lower interest rate and was able to drop the policy.
When I refinanced the house was worth more, and I’d paid down the mortgage a bit, so I had at least the required 20 percent equity. Years later I did the same thing in South Carolina, with my family’s next house.
For home buyers during the last several years, refinancing to get out of paying PMI is probably not a reasonable option.
In July 2021, the average 30-year mortgage interest rate nationwide was below 3 percent. Refinancing at today’s rates, closer to 7 percent, would result in far higher monthly payments even after dropping PMI.
Even someone who bought a house just a year ago would take a hit from higher interest rates that would likely outweigh the PMI savings.
A better option may or may not be possible, depending on your type of mortgage, the terms and the lender. That alternative is to pay for a new appraisal that would show your home’s value has increased so much since it was purchased that you now have more than 20 percent equity.
Here in the Charleston area, that’s pretty much assured for homes purchased before 2022.
Consider that the median price of a home across the Charleston region was $350,000 in the summer of 2021 and was $410,000 in June 2023, according to the Charleston Trident Association of Realtors. Before 2021 prices were even lower.
So let’s say a couple bought a $350,000 house in the summer of 2021 with 10 percent down. They started with $35,000 in equity, and could now have $60,000 more equity just because of the home’s increase in value — well over 20 percent equity.
Eliminating the PMI charges would require action on the borrower’s part. So, if you have a mortgage and you’re paying this extra expense, explore your options. If your lender would drop the PMI payments based on a new appraisal, without refinancing the mortgage, that could be a big money-saver.
Reach David Slade at 843-937-5552. Follow him on Twitter @DSladeNews.
