The lender calculates PMI at mortgage initiation and then it’s held constant until the mortgage is paid down and the loan to value (LTV) ratio reaches 78%. Even though a home’s value might have increased 25% in value, lenders will stick with the original schedule for cancelling PMI. It is up to you to keep track of market appreciation and practical home improvements and tell the lender of the increase in the home’s value.
Calculating LTV Ratio
The first step is to calculate the current outstanding “L” or mortgage loan balance. Each month, the mortgage principal and interest are paid and the outstanding mortgage balance falls. This impacts the “L” portion of LTV causing a small decrease in LTV each month. Over time, the loan is paid down enough to reach the 78% LTV ratio.
It is also important to keep track of the “V” or home “value” portion of the LTV ratio. There are numerous methods to estimate a home’s value – starting with simple, automated market estimates to a full, in-person home appraisal from a real estate professional that lenders consider when cancelling PMI.
AVMs / Digital Models
Automated Valuation Models or “AVMs” provide an estimate of a home’s value using mathematical models. AVMs use public data, home location, local or regional market inputs (i.e. new schools, local job outlook, etc.), comparable home sales data and real estate characteristics at a specific point in time. AVMs weigh the inputs and then produce an estimate of value. Most AVMs do not consider factors like specific improvements that have been made that might increase the value or problems with the house that could decrease the value. AVMs produce an unbiased, data driven estimate that can augment the traditional appraisal process for canceling PMI.
Some of the real estate websites like Zillow’s Zestimate or Refin’s home value tool provide home value estimates. AVM estimates can have large differences depending on differences in the models and inputs.
Comparative Market Assessment
You might also ask a local realtor to provide a comparative market assessment (CMA) to determine a reasonable potential selling price. This assessment is a good estimate of a home’s market worth and can be used to help create more confidence in estimated loan to value ratio calculations.
The real estate professional selects comparable sold homes in the same area. Then there are adjustments for home differences, e.g. garage spaces, number of bedrooms and bathrooms, amount of land, etc. and an estimate of value is made. Given the differences between the comparables, the realtor will adjust value estimates. What’s critical in determining market value is the selection of the best comparable properties. Choosing too different comparables can create big differences in home value estimates. Also, sales more than 6 months old might not reflect current values in markets with strong appreciation.
The desktop appraisal is a valuation performed without an onsite inspection of the home. This valuation from a licensed real estate “appraiser’s desk” is based on tax records and other public data. Think of it as combining a CMA with an AVM. The desktop appraisal is often a quick snap shot report of a few pages and less expensive than full appraisals. Remember that a desktop appraisal isn’t as accurate as a full home appraisal (below). Some lenders will allow desktop appraisals for loan origination or cancellation of PMI.
Think of full appraisals as a desktop appraisal plus an added in-person walk through of the home to assess home condition. It is more detailed and considers more data factors to fine-tune the home value estimate. A full appraisal also provides a chance to see and include home improvements into the valuation model.
Know the V in LTV
Your lender is required to cancel PMI at a 78% LTV ratio. Unless the bank is asked to consider market appreciation and other factors, it will stick with its original schedule at loan initiation for cancelling PMI. It is up to you to track local real estate appreciation and make home improvements to increase home value. Our recommendation is to consider multiple valuation estimates before moving forward with the request to cancel PMI. The more confidence you have in your home value estimate, the better chance the full appraisal will meet PMI cancellation requirements.