Hi, friends! Happy December 12th! I have a
Back in April of 2016, we bought our house at an online auction – I wrote all about that experience in my first-ever blog post here. After auction fees, we won our house at a price of $215,250. Far below market value, which wassuperexciting. That being said, we were newlyweds and didnothave the 20% down payment required for a conventional loan, so we had to get an FHA loan with Private Mortgage Insurance (PMI).
Okay, let me back up. I probably just threw a few words at you and you’re like, “whooda whatta PMI???”
Types of Loans
First, when you buy a house, there are generally 2 types of loans available to you: A conventional loan and an FHA loan.
A conventional loan requires that you have a 5%-20% down payment on your house (depending on the loan). So, in order for us to get a conventional loan, we would have needed a $43,050 down payment upon purchasing our house. That was out of the question. LOL.
PS – Equity is the amount of money we paid towards our house, orany extra money we would make from selling our house is also considered equity. I’ll be using that word a lot.
An FHA loan only requires a 3.5% down payment (so, $7,533, a lot more reasonable for newlyweds), BUT there’s a caveat. It requires you to pay monthly mortgage insurance (PMI) since it’s a “riskier” loan because you couldn’t pay the 20% down payment. Our PMI is about $100/month.
The PMI will be tacked onto your monthly mortgage payment until you’ve paid off at least 22% of your home’s purchase price. If you have a 30-year mortgage with a 10% down payment, that could take 7 years! That’s over $8,000 down the drain!!! No, thank you.
How Our Equity Increased
What many people don’t know is that you can apply to get rid of PMI!
Since we bought our house 2.5 years ago, we have donetonsof upgrades and renovations (see all our before and after renos). All of these upgrades have added a ton of value to our house, along with living in a rapidly-growing area.
Here’s a little chart to help. We bought our house for $215,000. If our house was assessed to be worth $315k (which means, they think we could sell it at that price), we would “make” $100,000. That $100,000 is considered an extra 32% equity!
32% Equity is above what’s required for an FHA loan, so it’s no longer considered risky and there’s no need for us to continue paying PMI! Woohoo!
The Process for Getting Rid of PMI
The process was super easy and only took about a month. First, we called our mortgage company to ask how to get started. We had to mail in a check for $105 and they would send a third-party broker to our home to do a quick evaluation.
We scheduled a time with the broker and honestly, her evaluation took about 10 minutes. She was super nice and just walked through our house and took a bunch of pictures. Of course, I wanted to make sure my house was spotless and not like the home of a crazy mom to a wild 1-year-old.
She asked that we also send her a list of all our DIY upgrades along with their cost. We calculated our home improvement costs to come to about $14,400 – you can see this list in our spreadsheet here.
A couple weeks later, we got a letter from our mortgage company saying that PMI was no longer required! Our loan-to-value ratio reached a percentage good enough to remove the PMI. Basically, we had enough equity in our home, compared to the amount of our mortgage, to no longer pay PMI.
Unfortunately, we never got the dollar amount our house was valued at. This wasn’t an official reappraisal, just a private broker’s opinion of what our house is worth,but wedoknow that we have at least 20% equity in our house. And we’re saving $1,200 every year we’re in this house, so I’ll call that a big fat WIN!
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