by Eric Black
When you purchased your primary residence (or any of your investment properties) with traditional financing, did you put less than 20% down? If so, read on. This could save you BIG money. If not, still read on, as this may help you in the future or help someone you know save BIG money.
While there are many markets throughout the country that are still clawing their way out of the great recession, there are also quite a few markets that have rebounded quite well and are at or above their values before the recession. While the topic of another bubble is a whole different debate, if you’re in a market that has recovered relatively well, then what you’re about to read could save you hundreds, possibly even thousands of dollars per year!
We purchased our current home in 2012 when things were still pretty down in the area of California where we live. We purchased a 4 bedroom, 2 ½ bath single-family detached house in a PUD community. We got what we felt was a good deal at $225,000 with 5% down using an FHA loan. The house was a foreclosure, but didn’t need much besides new flooring and paint. Fast forward just over 2 years, and the market has picked up quite well, and inventory is relatively low. A house behind us, which is an exact model match, recently sold for $315,000, and we just saw another one on the market for $319,000. Not bad for 2 years and relatively little work put into our house.
We could have refinanced, but we already have a very low interest rate of 3.875%, so paying closing costs of a few thousand dollars to save over $100 per month didn’t seem like the best move. My wife, having been in the mortgage industry for many years, had another idea that may work for any homeowner, not just investors. What is the easy trick I speak of? It’s as simple as calling your lender.
You see, when you purchase a house or investment property using conventional financing and you put less than 20% down, you typically have to pay Private Mortgage Insurance (PMI). This is an insurance policy that you pay for, but that doesn’t protect you in any way. Your lender will require you to pay this insurance to protect them in the case that you default, as a concession for letting you put less than 20% down. The loan is riskier for them so they want to protect themselves. Typically, once you have paid down your mortgage to the point where you owe 80% or less of the original loan amount, the PMI drops off and your payment goes down. Be sure to check with your mortgage company if you have paid down your mortgage to this point, however, as banks aren’t always on top of this.
How We Eliminated Our PMI
Since we bought our house just over 2 years ago with only 5% down, while we do pay slightly over the minimum required monthly payment, we haven’t reduced the principal balance by 15% or anywhere close to it. So how can you save potentially thousands of dollars per year without paying down your balance? As I said earlier, call your lender and tell them you would like to inquire about removing your PMI! We bought our house for $225,000 with 5% down, which meant we had a loan balance of just over $213,000.
To get to 80% of our loan value, we would need to reduce our loan balance to approximately $180,000. Our loan balance is a little less now — around $205,000 — but we don’t want to pay $25,000 out of our pocket to get our loan balance to that level. Thankfully, the market is strong where we live, and the prices have gone up. If our house is now worth around $315,000, in order to have a loan to value of 80% or less, our loan balance would need to be $252,000 or less. Since we bought our house for $225,000, our loan balance is definitely less than $252,000.
Last month I called our bank and inquired about eliminating our PMI. They said I had a couple of options to achieve this and explained each quickly. The first option was to make a one-time payment of approximately $26,000 toward our principal balance to get it below the required LTV amount. Each lender is different. Some may require your LTV to be lower, such as 78% or 75%, to eliminate the PMI so check with your lender to see what their requirement is.
Our lender, Wells Fargo, was willing to eliminate the PMI, assuming the value had increased enough, since we have owned the property for at least two years. Another BPer said he called his lender, Chase, who told him he would need to own the property for five years before being able to eliminate the PMI. I recommend calling your lender, and if they state it’s anything over two years, call back later to see what the next person says.
The second option presented to me was much more appealing. We paid $360 to have our home appraised by a company that Wells Fargo contracts with. As I stated, it will cost you a few hundred dollars, but it can be well worth it. If you don’t think your home or rental property has appreciated enough, then it’s your decision whether to spend the money on the appraisal or not. Previously, we were paying $119 per month in PMI. That has now been eliminated, meaning we are saving $1,428 per year for spending 15 minutes on the phone and paying $360 for an appraisal.
So if you subtract the appraisal fee, then true, we’re only saving $1,068 this year, but I’ll still take it. Had we waited until we had paid down our mortgage the additional 15% to get to an 80% LTV, our PMI wouldn’t have been eliminated until June, 2020 — about 5 ½ years from now! At $1,428 per year, that means if we stay in our house that long, we will have saved $7,854! That’s just on our primary residence. We have put 25% down on all of our rental properties, so this won’t help us in those cases, but for investors who have purchased properties with 3%, 5%, or anything less than 20% down, you could do this with every property.
Obviously, this only works if the market where you own your primary residence and/or your rentals has gone up more than slightly. In areas like the Midwest, where cash flow is usually great but appreciation is typically relatively small, it may not work. For those of you who have invested in markets where appreciation is stronger, however, this could save you huge amounts of money each year.
We’re enjoying the extra cash every month and hope that this can help you achieve the levels of success you are looking for faster as well.
Have you eliminated PMI on any of your properties? How much money have you saved using this tip?
Leave a comment below, and let’s discuss!
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