Do I Need an Appraisal to Remove PMI? A Detailed Guide

Private mortgage insurance (PMI) is an extra cost that lenders often demand when borrowers put down less than 20% of the purchase price. Even though PMI protects the lender in case the borrower doesn’t pay back the loan, it also makes the borrower’s monthly payments higher. Of course, most homeowners want to get rid of PMI as soon as possible to save money. But how do you get rid of PMI? One common way is to get an appraisal, but do you really need one? Let’s find out.

What is Private Mortgage Insurance (PMI)?

First, to understand whether an appraisal can remove PMI, we need to cover the basics of what PMI is

PMI is a type of insurance that protects the lender if the borrower doesn’t make their mortgage payments. Additionally, it is usually needed when the down payment is less than 20% of the purchase price. PMI payments are part of the monthly mortgage payment and can be anywhere from 0 3% to 1. 5% of the total loan amount annually.

PMI only protects the lender, not the borrower. It remains in place until the borrower accumulates enough home equity to reach 20% of the original home value.

When Can PMI be Removed?

Most borrowers want to remove PMI as soon as possible to reduce expenses. Here are some common ways PMI can be canceled:

• Automatically: Some mortgages require PMI to be automatically canceled when the loan balance reaches 78% of the original home value.

• On Request: Once you reach 20% equity, you can request PMI cancellation through your lender.

• New Appraisal: Getting a new appraisal showing 20% equity allows you to request PMI removal.

• Refinancing: Refinancing into a new loan can eliminate PMI.

Do I Need an Appraisal to Remove PMI?

Getting a new appraisal is a popular tactic for removing PMI. But do you really need one?

The short answer is – it depends on your situation. Here are key factors to consider:

• Loan Type: FHA loans require an appraisal showing you’ve reached 20% equity before removing PMI. Conventional loans only require an appraisal if you want to remove PMI early.

• Equity: If you already have 20% equity, you may not need an appraisal for PMI removal, just submit a request.

• Home Value Increase: An appraisal can capture home value appreciation, helping you reach 20% equity faster.

• Lender Policy: Some lenders require an appraisal, others just need a broker price opinion (BPO) or automated valuation model (AVM) estimate.

While not always mandatory, getting an appraisal can be useful to verify increased home equity and ensure a smooth PMI cancellation process.

Using an Appraisal to Remove PMI Early

For conventional loans, borrowers can request PMI removal once they reach 20% equity through increased payments or home appreciation. However, lenders usually only have to honor this request once you hit the halfway point of the loan term.

Getting an appraisal is the best way to get rid of PMI before the halfway point because it shows that you’ve already reached 2020 equity.

How to Get a PMI Removal Appraisal

If you want to use an appraisal to remove PMI, follow these steps:

• Contact lenders to ask about their appraisal requirements for PMI cancellation.

• Choose an appraiser and order a full interior and exterior appraisal.

• Provide access and information to help the appraiser accurately value your home.

• Review the appraisal report to ensure no major inaccuracies or undervaluation.

• Present the appraisal to your lender along with a formal request in writing to terminate the PMI based on confirmed 2020 equity.

Follow up persistently with your lender to get PMI removed once you’ve met the requirements. Don’t give up if it takes some time and effort!

Refinancing to Remove PMI

Refinancing involves taking out a new mortgage loan to replace your existing one. This allows you to change the loan terms to potentially get a lower rate or switch from an FHA to conventional loan.

Since you apply for a brand new loan, you get a new home appraisal during the refinance process. If the appraisal shows you have 20% equity, you can refinance into a loan without PMI and eliminate it that way.

Should I Refinance Just to Remove PMI?

Simply refinancing to remove PMI may not always make sense. You’ll have to pay closing costs for the new loan, so it’s important to run the numbers.

Aim for at least a 0.5% decrease in your interest rate to make refinancing worth the costs. Use a mortgage refinance calculator to estimate your breakeven point where savings from the lower rate outweigh refinance costs.

Evaluate current mortgage rates to see if there’s opportunity to reduce your rate. Refinancing can be a great “two birds, one stone” strategy to eliminate PMI while securing a lower rate, but make sure it pencils out before proceeding.

Removing PMI by Increasing Home Equity

As we’ve discussed, reaching 20% home equity is the key to PMI removal. Outside of an appraisal, there are a few other ways to increase equity:

• Make extra mortgage payments – Putting additional money directly towards your principal monthly can get you to 20% equity faster.

• Pay down other debt – Freeing up money from other debts allows you to put more towards your mortgage.

• Make home improvements – Increasing your home’s value through renovations also builds equity.

• Wait for appreciation – Home values in your market rising naturally over time builds equity as well.

Using a combination of strategies to build equity and improve your loan-to-value ratio is crucial for getting rid of PMI successfully.

Alternatives to an Appraisal for PMI Removal

While an appraisal is the gold standard, here are some alternatives to consider:

• Automated valuation model (AVM) – Computerized estimate of home value using public data.

• Exterior-only appraisal – Cheaper but less accurate option focusing just on exterior.

• Broker price opinion (BPO) – Less formal value estimate from real estate agent.

• Assessed home value – Value used for property tax purposes, usually lagging.

These can sometimes be accepted instead of a full appraisal but may depend on your lender’s policy. Shop around to find a lender willing to use alternatives if desired.

Removing PMI: Is an Appraisal Your Best Bet?

At the end of the day, getting a full, interior/exterior appraisal from a licensed professional is the most surefire path to verifying your equity and removing PMI.

While certainly not required in every scenario, an appraisal provides hard evidence of your home value and equity position, limiting lender objections during the PMI removal process.

If you can afford the appraisal cost and want to ensure smooth sailing getting rid of PMI, ordering an appraisal is your best bet. Just make sure you fully understand your lender’s policies and requirements first.

With preparation and diligence, you can get PMI removed without it eating away at your finances for years. Reach 20% equity and don’t take no for an answer from your lender!