Private Mortgage Insurance, or PMI, is another drain on your wallet. If you buy a house, but are unable to make a 20% down payment, PMI will apply in most cases. It can be quite expense as well, often costing $50-$100 or more per month. The worst part about it is that you are actually paying for insurance for the lender, not you. This insurance protects the lender if you can’t pay on your loan. Essentially the idea is that you are a higher risk to the lender because of your lower down payment, so this coverage allows the lender to mitigate their risk. Somehow they are able to get you to pay for it!
One way to avoid PMI is an 80/10/10 loan. In this example, you put 10% down and get an 80% first mortgage. Since the first mortgage is 80%, you avoid PMI. The other 10% is a second mortgage. As long as the terms and interest rate on the second mortgage are reasonable, this might be a viable option for many.
If you already have PMI, don’t wait to drop it! Once you prove that you have 20% equity, you get to drop PMI and the monthly payment. Check your loan agreement and contact your lender. Often you need an appraisal to prove that you have 20% equity. How do you know if you have 20% equity? You won’t know for sure until you get the lender’s official appraisal, but there are a few things you can check before you request the appraisal. Often you might be required to pay for the appraisal, so you’ll want to make sure you are confident you have the equity before making the request.
One way to check your equity is to look up recent home sales of comparable properties. You can do this through a number of online services such as Realtor.com and Zillow.com. Another is to check the estimated fair market value on your property tax bill. Either one should give you an idea of how much equity you have (Fair Market values less outstanding principal = equity). You compare the estimated fair values to your outstanding loan amount to determine your equity percentage.
I successfully did this a long time ago with my first home. Once I proved it to the lender by getting an appraisal, I was able to drop the PMI. You can too!
