Should I Get Rid of PMI by Paying Down Principle?

Let’s talk about private mortgage insurance (PMI) and how much of a scam that is to me as mortgagee. PMI insurance is not for me, it’s for the lender incase I default on my mortgage and can’t make the payments. Obviously, I want to get rid of PMI as soon as possible. Question is if I should get rid of PMI by paying more money toward bringing down the principle balance on my house.

Let’s Jam!

Contents

How to get rid of PMI

These are my options to get out of private mortgage insurance (PMI). I have ordered these from least-preferred to most-preferred. We want to go for option 3, if we can afford it.

Wait for loan to reach automatic PMI removal at 78% LTV (loan-to-value)
Wait for loan to reach 80% LTV per schedule and then take action to request in writing removal of PMI by our mortgage company. We have the right to request removal of PMI at 80% LTV.
Take action and request PMI removal and make an extra principle payment to make it happen ahead of schedule.

PMI Removal Process for Option 3

All communications with our mortgage company must be in writing. We can make phone calls, but everything that they say and that we say should be captured in writing so that we have a written trail of evidence. We do not want to provide the opportunity to our mortgage company to go back on their verbal word. Also prepare for the process to be lengthy. It’s not super time consuming, but the process does require us to be persistent, every day.

Here’s what the process of removing PMI looks like:

Step 1

First, submit request for PMI to our mortgage insurance in writing.

Step 2

They will reply back that they need time to research. This is a delay tactic.

Step 3

Eventually they will tell us that our loan meets the LTV, usually 75%, to get rid of PMI ahead of schedule and we’re golden! Or, they tell us that our LTV is insufficient to get rid of PMI and we must keep PMI.

Step 4

Write back that we believe the value of our home has increased and request a formal and independent valuation in writing.

Step 5

Our mortgage will choose an appraiser and we will get their contact information. The ball is with us now. We need to pay the appraisal fee and schedule a time for them to come visit the house to do the assessment.

Step 6

We want to clean up and spruce up our house as much as we can so it looks really good. Just like we would if we were selling our house and trying to get the highest offer in a bidding war.

Step 7

We need to chase chase chase our mortgage company now. After the appraiser is done and we have graciously given them a few business days to submit their report to the mortgage company, we now need to be on the case of our mortgage company. Don’t procrastinate. We need to keep the pressure on them.

Step 8

They will eventually say something about LTV again. They may not provide a number required to “close” and bring our LTV to the required amount. We will need to press them to get this number.

Step 9

We finally receive the hard $ amount that we will need to pay down to bring our principal balance to the required LTV to get rid of PMI. We can’t sit on this too long because the appraisal valuation will only be valid for a limited 30-90 day period of time. We need to be ready to turn around and write a check and pull the trigger.

Step 10

Write a check to make an extra principal payment of the amount our mortgager told us.

Step 11

Again request PMI removal and reference the appraisal and extra principal payment confirmation number and that we want PMI cancelled immediately.

Done Finally!

Free of the PMI scourge at last! 🙌😮‍💨

My PMI Removal Saga

Here’s a timeline illustration of all my actions to give you a sense of time scale and persistence required to eventually get rid of PMI on your primary home mortgage. It’s a lot to take in! The short story is that you should anticipate and be prepared to take the initiative and keep up the persistent pressure on your mortgage company until they are forced to relent and cancel private insurance on your loan.

April 2021

Bought Primary Home

Mortgage starts with PMI for the next 12 months

April 2022

Request PMI Removal

Appraisal says value has increased, but not sufficient to reach break-even. I continue to pay PMI for another 12 months. Appraisal cost about $600.

April 2023

Request PMI Removal (again)

I request appraisal again. Costs another $600.

May 2023

Request Appraisal Results

Mortgage company says LTV is insufficient to remove PMI. I am chasing nearly every day to get a copy of the appraisal data as required by law. Also requesting the principal pay down amount to reach necessary LTV. Push on this every business day.

June 2023

Pay Extra Principle

Receive appraisal data and the amount of principal I need to pay down to reach necessary LTV and it’s about $11,000. I immediately initiate a one-time extra principal payment and request immediate cancellation of PMI.

July 2023

PMI Cancelled

Confirmation that PMI has been cancelled.

Cost Analysis

Cost #1: Valuation — just because Zillow or Redfin say that our home value has increased, the mortgage company is not going to just take our word for it. They will bring in their own assessor to come to my house, take photos, and do a valuation and then we get to pay for it. Costs could range $500-900 for this service. Given the high cost, we will want to be realistic and confident in our own valuation because we will want the appraiser to give us numbers in the same ballpark of our calculations.

Cost #2: Time & Persistence — our mortgage company has no drive or motivation to cancel PMI insurance. It’s insurance for them at our expense! Therefore, WE must push push push them every step of the way and keep persistent pressure on them. We do this by following up on action items to keep our request moving through the process.

Don’t make any assumptions about what the lender is going to do. Follow up on next steps like a bird dog that won’t release its prey once it has latched on. If the mortgage company tells us to expect a response in 5-7 business days, and we have not heard anything by the 7th day we need to be picking up that phone the same day and squeaking our wheel and grinding our axe. This won’t take a LOT of time, but it does require us to be persistent and relentless every step of the way. Our mortgage company is not going to move fast for us, WE have to make them move.

Cost #3: Cash to make an extra Principal payment — our mortgage company will make us bring our outstanding balance to the required loan-to-value required which is generally around 75% LTV if we’re not waiting for the natural LTV cancellation date required by law.

Benefit Analysis

Benefit #1: more cashflow because we no longer have cost of PMI in our monthly mortgage payment

Benefit #2: money goes into our own pocket, instead of the pocket of a private insurance provider to the benefit of only our mortgage company. Even if we have to make an extra principal payment, that money is kept in our net worth rather than vanishing to somebody else as an expense.

This #2 benefit is HUGE and hidden. It’s not just about increasing our cashflow by a couple hundred dollars every month. It’s about putting money that would have been “wasted” and keeping that in our net worth. It’s like double dipping! We get more cash flow, and we kept that money in our own pocket in the form of equity on the house.

Another way to think about it is that it’s a guaranteed rate of return. Where else could we put our money where it will have a guaranteed rate of return!? By paying down extra principal, we are in essence giving ourselves a guaranteed rate of return on that money of our mortgage interest rate.

And lastly, even if we need to pay more principal than it would cost compared to just paying PMI until it must be removed automatically by law, and even if we have a really low 30-year fixed mortgage under 3%, that money that we paid for PMI to a 3rd party is an expense. We’ll never see that money again. That money would have contributed ZERO value to our portfolio. Instead, if we use that same money to make a principal payment, not only is it a guaranteed rate of return matching our interest rate, but it is also the fact that we have kept that money in our portfolio as equity in the house.

Conclusion: Final Analysis

Should I pay extra principal to reach required LTV on our mortgage to get rid of PMI? Yes, most likely. It all comes down to our personal numbers. In the final analysis we have to decide if it’s worth the cash in trade for more cashflow. But remember that in addition to more cashflow from not having to pay PMI every month, we would keep that money in our home equity.

If we had chosen not to pay extra principal and just keep paying PMI until it expires naturally, every penny of our hard earned money is just going into the pocket of a private insurance company to the benefit of our mortgage company. Screw that! We want to put that money toward our own asset into our own pocket and not somebody else’s.

I chose to make an extra principal payment because the nubmers were to my advantage and I chose to invest in myself! I highly recommend that you make your money work for you instead of working for your money.