Getting rid of that pesky property mortgage insurance
One of my former work colleague’s grandmother gave her $20,000 for a downpayment when she was buying a home. When we sold our home in College Station, the buyer’s dad wired her $100,000 from Brazil1. For the rest of the schmucks like us who do not have any social capital in this country, we also don’t have access to that kind of financial capital when we decide to buy our first home. We were simply lucky enough to be able to make a winning offer on our current home without any competing all-cash offers.
After pooling our savings and the meager $500 we made off our previous home sale2, we could only obtain an FHA loan that required a minimal amount of downpayment. We were also lucky in the sense that our home in College Station sold very quickly because our home purchase in Austin was contingent on that sale. In spite of that bit of luck, not everything was smooth.
So fast forward five years after regular mortgage payments, my wife happened upon an article in Apple News, of all places, about removing your property mortgage insurance (PMI).
So, as I mentioned above, for regular schmucks like us without generous relatives, we’ve to opt for an FHA loan which sounds great as it provides access to homeownership that otherwise it wouldn’t but we’ve to pay a monthly premium for insuring our mortgage. This is basically to protect the bank in case of default. We also paid that for our first home but since the big recession, the amount had quadrupled and it was nearly $200 per month on top of our principal, interest, and property taxes! The PMI is removed from your account when your Loan-to-Value ratio (LTV) falls below 80%. The LTV is calculated using the bank-conducted appraisal before they approve your loan to know if your home is indeed equal to the loan you’re getting. Obviously, ours was way north of 80% when we started out. Unless you suddenly hit a jackpot and can pay down your principal so that you’re LTV falls below 80%, you have to basically wait it out as your monthly principal payments gradually bite away at that LTV.
Anyway, back to that Apple News article, it mentioned that your home’s value is not static and if you could get your bank to re-appraise your home and your LTV falls, you can get rid of that monthly pesky mortgage insurance. It turns out that the “value” of the home is approximately the sales price your home would command if you put it on the market.
I contacted my bank and was given the fine print. Yes, the article was correct but…it could only be done after 5 years of paying your mortgage, if a re-appraisal was done then the new LTV for removing the PMI would be 75% and not 80%, and the new appraisal would cost us $585. The first condition was easy since coincidentally, it was five years to the date when we first found out about this. Now, it was up to us to roll the dice and evaluate if $585 was worth spending to find out if our home had appreciated enough in five years in combination with our shrinking the loan principal.
So after some back-of-the-envelope calculations and consulting our realtor and Zillow, we decided to roll the dice and order the new appraisal. We had a figure in mind that we would need to reach for our LTV to hit 75% based on how much loan principal we still owed. After that, the process moved fairly quickly. We mailed a check to our bank along with a letter explaining the reason for a new appraisal. We were contacted by a third-party appraisal for an inspection date. We thoroughly cleaned and staged our home almost as if we were going to sell it and braced ourselves. The inspection itself was quick and took less than an hour. She took measurements and photos. She skimmed the list of upgrades we had made to the house including our new solar panels.
After less than a week, we got our result. It turns out we need not have worried at all. Thanks to Austin’s hot property market, our new LTV was now 68%!!!! The bank didn’t even bother contacting us and simply sent us the appraisal report along with a letter saying that our PMI was now removed from our account. Hallelujah! It feels damn good when your gamble pays off. The new monthly mortgage payment dropped immediately starting the following month by the amount of the PMI.
By my calculations, we ended up saving more than $6,500 over the next three years by paying $585 last month. I guess that’s how rich people feel when they use the money they have to save or even make more money.