To calculate the LTV ratio, divide $258,000 by $300,000 to get 86. Expressed as a percentage, this is 86%. The LTV ratio is 86%.
PMI is generally required for borrowers who take out a conventional mortgage with a loan-to-value ratio of 81% or higher.
In this example, the lender will charge PMI until you qualify for auto-cancellation at 78% LTV or request PMI termination at 80% LTV.
There’s more than one route to cancelling PMI. Next, we’ll go further in depth on your main PMI cancellation options.
1. You qualify for auto-cancellation with a 78% LTV.
Under rules outlined by the Homeowners Protection Act (PMI Cancellation Act) of 1998 or HOPA, homeowners have the right to have their PMI removed automatically on the date that their principal balance is scheduled to reach 78% of the original value.
On a home you bought for $300,000, you would qualify for auto-cancellation when your mortgage balance hit $234,000. (Divide $234,000 by $300,000 to get 78% LTV).
A homeowner must be current on their payments for this automatic removal to occur. In addition, auto-removal does not take into account property upgrades or market appreciation. It is only based on how much you originally bought the house for.
2. You hit 80% LTV and request removal.
HOPA also allows homeowners to initiate PMI removal once the principal balance of their mortgage drops to 80% of the original value of their loan. In our $300,000 home example, you would have the ability to request PMI removal once the amount owed on your loan hit $240,000 (or 80% of $300,000).
You could hit 80% LTV ahead of schedule by making extra or larger payments on your mortgage than required. You could also set a notification for the date you’re scheduled to reach 80% LTV so you’re reminded to put in the cancellation request with your mortgage servicer as soon as you’re eligible for PMI removal.
3. You re-appraise your home after it gains value.
Generally, you can request to cancel PMI when you reach at least 20% equity in your home. You might reach the 20% equity threshold by making your payments on time per your amortization schedule for loan repayment. But you also may get to that 20% benchmark faster thanks to rising property values in your area – or by investing in home improvements.
Let’s again say you purchased that lovely home for $300,000 a few years ago with $42,000 or 14% down, so you’re paying PMI. You notice that local news reports indicate that property values are rising. Based on some initial research, you estimate the current value to be $365,000.
So now your equity in the home is $107,000. How did we get there? We took your $42,000 down payment and added $65,000 in equity gains due to market appreciation.
Congrats! You’ve now well surpassed 20% equity (you’re actually now at nearly 30% – or $107,000 in equity divided by $365,000 in value) and that’s not counting the additional equity you’ve built making mortgage payments.
Let’s say you’ve paid $15,000 of your primary mortgage balance, bringing it to $243,000 ($15,000 subtracted from the original balance of $258,000). Meanwhile your home value grew to $365,000. Your new LTV would be 67% ($243,000 divided by $365,000) or well below the 80% threshold.
So let’s recap: What just happened? The above example goes to the heart of the question: Can I cancel PMI if my home value increases? The answer is: Maybe!
“In an upswing like this I would say you have a better chance of getting rid of your private mortgage insurance, but it’s not a guarantee, because it depends on each lender’s process and making that happen,” says Vickie Clark Jennings, a top real estate agent in Fredericksburg, Maryland.