I reached out to my lender today and he told me that:
If I have 78% LTV of the original home appraisal, PMI is dropped automatically; however,
If I reappraise the home and the value increased, making the LTV 78% or lower, then I will need to refinance the home to get rid of PMI (and I assume that usually incurs closing costs).
Is that correct? If I reappraise my home and show that it's worth more than before, I have to go through the whole refinancing process?
The Homeowners Protection Act of 1998 lays out the minimum standards for mortgages in relation to PMI cancellation. There are two ways it can be cancelled: automatic, and borrower-requested.
Automatic is when it reaches 78% of the original value of the property - at that point, the bank must cancel PMI, regardless of the current value or any other details.
Borrower-requested is when the borrower requests it be cancelled. It requires only 80% of the original value (the lesser of the sales price or the appraisal at purchase), but it also requires the house not to have gone down in value. This may be where you're thinking an appraisal comes in; it's possible that the lender requires an appraisal to prove the value has not dropped.
There is nothing in the act allowing for it to be cancelled based on a new appraisal showing the value has risen, however. It's entirely possible that a mortgage might include such a term; it would not be required by law, however, so it's up to what was agreed on at signing.
You would potentially be able to refinance, of course, depending on your credit and other details, but it would not be free, obviously.
Here's the text:
Borrower-Requested Cancellations
A borrower may initiate cancellation of PMI coverage by submitting a written request to the servicer. The servicer must take action to cancel PMI when
• The principal balance of the loan
– Is first scheduled to reach 80 percent of the ‘‘original value’’4 (regardless of the outstanding balance), based on
– The initial amortization schedule (in the case of a fixed-rate loan)
– The amortization schedules (in the case of an adjustable-rate loan) or
– Reaches 80 percent of the ‘‘original value,’’ based on actual payments
• The borrower has a good payment history5
• The borrower satisfies any requirement of the mortgage holder for
– Evidence of a type established in advance that the value of the property has not declined below the original value and
– Certification that the borrower’s equity in the property is not subject to a subordinate lien
And the footnotes:
Original value is defined as the lesser of the sales price of the secured property, as reflected in the purchase contract, or the appraised value at the time of loan consummation.
A borrower has a good payment history if he or she (1) has not made a payment that was sixty days or more past due within the first twelve months of the last two years prior to the cancellation date or (2) has not made a payment that was thirty days or more past due within twelve months of the cancellation date.
