Borrowers in states with the greatest real estate appreciation over the lasts several years might be able to cancel PMI. Some locations might surprise you! PMI could be cancelled sooner assuming the loan is in good order, e.g. no late or missed payments, home is still in good order, etc. If you’ve had a mortgage with PMI for several years and your real estate market is hot, then you should find out more from your lender about cancellation of PMI. Remember, the lender is required by law to eliminate PMI when your mortgage loan to value ratio reaches 78%.
A Simple Example
For example, if you purchased a home for $100,000 and you put $5,000 or 5% down payment toward the home, you’ll have a 95% loan to value ratio or LTV ratio to start:
$95,000 / $100,000 = 95% LTV
But what about markets where real estate has appreciated 10%, 15% or even 20%+ over the last several years? Continuing the same example above, if the home has appreciated 20% over the last several years, the LTV calculation is now:
91,000 / $120,000 = 75.8% LTV
This simple calculation shows that the value of the home has risen, the outstanding loan has fallen due to principal payments and the resulting drop in the LTV ratio. Two things are important here. First, you’re responsible for keeping track of the potential increases in the home value including market appreciation and home improvements. Second, you’re responsible for making your mortgage lender aware of this increase in value and requesting cancellation of PMI.
Don’t Overpay PMI!
According to the Federal Home Loan Mortgage Corporation or Freddie Mac, some states in the U.S have seen dramatic average market appreciation over the last several years (using data from 10/1/2014- 9/30/2017). Some states might surprise you. Michigan and Tennessee, for example, are states that have seen an average of over 20% appreciation during the last several years. The chart below highlights the markets that might now have the greatest appreciation and best chance to cancel PMI.
This graph is a quick view into what is happening on a broad, average level at each state. Federal Home Loan Mortgage Corporation or “Freddie Mac” calculates an average home price index also at the MSA level (metropolitan statistical area). More information is available at the Freddie Mac website.
Once your confident that your LTV ratio has reached 78%, you can contact your lender to request cancellation of PMI. The mortgage lender should have provided information at the loan closing providing contact information and disclosing the right to PMI cancellation. Find out about rules, costs, timing and potential penalties charged before you make a formal, official request to cancel PMI. Each lender’s process is a little different, so get the details and requirements to save time and headaches.