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The LTV on my 30-year mortgage recently decreased to 79%, and I called the lender to drop the PMI on my loan. The customer service representative to whom I spoke said that there would be $400-$500 fee for an appraisal. However, if I waited until the LTV decreased to 78% the PMI would be automatically removed. The PMI on my loan is approximately $62/month, and according to my amortization schedule it will take 13 months to reduce the LTV to 78%. During that time I would pay about $800 in PMI as opposed to the $500 fee for the appraisal.

Are there any disadvantages to dropping the PMI now instead of next year when it is automatically dropped at 78%?

  • Is it guaranteed that the appraisal will show that the LTV will be 78% or less based on the current level of mortgage still owing and the new assessed value? – Dilip Sarwate Jan 13 '16 at 7:57
  • @DilipSarwate I don't know. For the LTV to go up, I assume the value of the house had to increase? – RHPT Jan 13 '16 at 15:10
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    You have it backwards. LTV is the ratio L/V, i.e. V is in the denominator. So LTV goes up when the value goes down, and vice versa. So if the value of the house stayed the same as the sale price or went up, you will still be at 79% or under and will be able to drop PMI. If the value went down, your LTV might now be over 79% and you would have paid for the appraisal without gaining any benefit. Thus you really want to have some sense of where property values in your area have been going. – Nate Eldredge Jan 13 '16 at 16:04
  • The "automatic" dropping of PMI at 78% LTV (which is based on the original value of V, not the current value of V as determined by an appraisal or sheer conjecture or whatever) also requires that the owner be current on the payments. If, due to late payments and the resulting extra interest and possibly fees, the actual arrival at 78% LTV is later than the date on the amortization schedule, then the automatic dropping occurs at that later date. – Dilip Sarwate Jan 13 '16 at 19:41
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The disadvantage is the risk of spending money on the appraisal, and missing the magic cutoff value by just a few dollars. How confident are you that you will get an appraisal at 79%?

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Instead of paying the lender 400 - 500 $, you could consider paying that money directly on your mortgage (as an extra payment); that might reduce the percentage to 78% right away, or at least earlier than planned. In addition, you will save the interest on this payment for the remaining time of the mortgage.

You did not give the total remaining principal, so you need to do the math yourself - how much is needed to get it to 78% right now with an extra payment. If you can afford that, it seems to be the most profitable way for you.

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    Sorry, no. The automatic PMI cancellation comes from natural amortization to 78, i.e. Prepayments won't help. The PMI drop date is determined from the amortization table the day you close on the loan. You can pay the mortgage down to 50% LTV, but the bank can still require an appraisal. – JoeTaxpayer Jan 13 '16 at 15:17

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