In the real estate investment world, savvy moves can lead to significant gains. One of those intelligent moves, especially for property investors, is removing Private Mortgage Insurance (PMI) from your home loan. If this sounds like a mundane technical detail, let me assure you, it's far from that. This is about increasing your cash flow and profitability by a strategic method that is fully within your reach. In this article I’ll explain the steps to take and include a sample letter template for you to use.
Our Story and What You Can Learn From It
In 2019, Elenis and I used our HELOC to make a 15% down payment on our third rental property. Consequently, we were charged monthly PMI payments that didn't contribute to the principal or interest on our loan.
For those unfamiliar, PMI is a requirement by conventional lenders on conforming loans when the down payment is less than 20%. It's a safety net for lenders, but for investors like us, it's an extra expense. But the good news is, it can be removed, leading to substantial savings.
Maximizing Profits by Minimizing Down Payments
Why even put down less than 20%? It's not about taking unnecessary risks but strategically maximizing assets. A smaller down payment lets us distribute funds across various investments instead of sinking everything into one property. While this may lead to PMI charges, the strategic benefit is shifting a portion of the risk to the lender. It's a well-calculated move that, with the right steps, can lead to bigger gains.
Removing PMI: A Strategic Guide
The U.S. Federal law, specifically the Homeowners Protection Act (HPA) of 1998, empowers homeowners to eliminate PMI under certain circumstances. Here's a concise and actionable guide on how you can do it too:
1. Automatic and Final PMI Termination:
Automatic Termination: If you're punctual with your payments, the lender will automatically terminate PMI when your principal balance reaches 78% of your home's original value. This often happens around year 5 for standard 30-year mortgages, provided payments are made on time.
Final Termination: This brilliant provision allows you to end PMI at the halfway mark of your loan's full term, even if your home's original value hasn't reached 78%. Just stay on track with your payments, and you can wave goodbye to PMI after 15 years on a 30-year loan.
2. Requesting PMI Cancellation:
When your mortgage's principal balance nears 80% of your home's original value, you can request PMI cancellation. The criteria include:
A written request to your servicer.
A solid payment history.
No secondary liens on your property.
Meeting any additional conditions such as a possible appraisal.
In our experience, we paid a $190 fee for a broker's opinion to determine the value of our property, and the process took around 8 weeks.
3. Building Equity:
You can increase equity by paying extra towards the principal or enhancing your property's value through strategic renovations. Both methods help in getting rid of PMI sooner.
Maximizing Your Investment with PMI Savings
One remarkable benefit of eliminating Private Mortgage Insurance (PMI) from your mortgage is the opportunity to reinvest those funds back into your property. In our own example, our PMI payment was $50 per month, totaling $600 per year. Rather than pocketing this money once the PMI was removed, we continued to make the same payment amount each month, redirecting the $50 towards the principal balance. Now, let's explore how this seemingly small adjustment makes a significant difference. With a 30-year fixed-rate loan at 4.75%, 25 years remaining, and a balance of $97,000, the extra $50 per month contribution towards the principal balance translates into substantial savings over time. By making this strategic move, we will reduce the life of the loan by nearly 4 years and save approximately $8,680 in interest. This approach embodies a prudent investment strategy, reinforcing the importance of wise financial management and exemplifying how small adjustments can lead to significant long-term gains. It is a clear pathway to accelerate the payoff of your loan, maximize your asset's value, and enhance your financial freedom.
How to Request PMI Cancellation: A Sample Letter
To aid you in this process, here's a template of the letter we used to request our lender to cancel PMI. This document, combined with regular follow-ups, is the pathway to your successful PMI cancellation.
Conclusion: Elevate Your Investment Game
Removing PMI isn't just a procedural necessity; it's a strategic maneuver to boost your investment's profitability. It's about understanding the laws, playing your cards right, and growing your assets in a well-informed manner.
By adhering to the guidelines of the HPA, building equity, and actively working with your lender, you can not only save money but also supercharge your investment portfolio. It's not just about avoiding a fee; it's about building wealth, one well-calculated step at a time.
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Legal Disclaimer: The information provided in this article is for informational purposes only and does not constitute financial, legal, or investment advice. Real estate investing is inherently risky, and the strategies discussed in this article may not be suitable for everyone. I am not a lawyer, certified public accountant (CPA), or financial advisor, and the contents of this article should not be relied upon as professional advice.
Readers are encouraged to seek advice from qualified professionals who are familiar with individual financial situations and needs before making any financial or investment decisions. While the examples and strategies discussed are based on real experiences, there is no guarantee that similar results will be achieved. I, and collectively, Thirdstone Properties, LLC, expressly disclaim any liability for any loss or risk, personal or otherwise, that may be incurred as a direct or indirect consequence of the use or application of any of the contents of this article. Your use of the information is at your sole risk, and I, and collectively, Thirdstone Properties, LLC, assume no responsibility for any adverse consequences that arise from the implementation of the information provided.