In early 2016 I purchased a house with only 10% down, yes you read that right. I broke one of the conventional rules that fiscally sound home buyers live by. There’s a good reason for this rule because, without 20% percent down you, the homeowner is required to pay PMI or private mortgage insurance. See Why I decided to purchase the house without enough money to put 20% percent down.
As a consequence of only paying 10% down, I was stuck with an extra $123.44 a month in mortgage insurance premiums. My goal was to get rid of that PMI as soon as possible, the alternative, wait 7 years and 8 months for my Loan to Value to reach 78% based on the original amortization schedule. Paying a grand total of $11,356.48 in PMI premiums over that time. Ouch!! Understandably my goal was to get rid of it as soon as possible.
You may be wondering how Solar Panels fit into this, well in addition to the obvious benefits, you can use them as a tool to increase the equity in your home and drop Mortgage Insurance faster, I’ll get into that more in a bit.
If you find yourself in the situation I was with my PMI, the way out is to pay down enough on your loan to where you have an 80% Loan to Value. Then you need to notify the mortgage company and request that your Mortgage Insurance Premium be dropped.
Here’s the deal, the mortgage company is not your friend in this effort. The bank doesn’t want you to stop paying for insurance, the insurance guarantees they’ll get paid. It’s in their best interest that you keep it as long as possible.
When you put in a request to drop your PMI you’ll get some information in the mail basically saying that you will need to pay for an appraisal and then if the value is high enough (80% LTV or 20% Equity in the home) they agree to drop your mortgage insurance.
There is nothing more demoralizing than paying $450 dollars for an appraisal, just to have your home appraise 7% lower than the original value of the loan (quite convenient for the mortgage company). Suddenly finding yourself out $450 dollars and thousands of dollars away from dropping those pesky Mortgage Insurance Premiums. Believe me, I found myself in this exact situation back in 2013.
Learning from past experience, my strategy to drop Mortgage Insurance Premiums was three-fold.
- Aggressively pay off principal
- Look for ways to increase home value
- After 9-12 months have my real estate agent run comps for me to gauge whether I had enough equity in the home to feel comfortable enough to pay for an appraisal as part of my request to drop PMI.
In short, I needed as much wiggle room as possible. I didn’t want to pay for another fruitless appraisal.
Let’s talk about Solar Panels, four months after our home purchase in 2016 I was looking at buying solar panels as a way to increase the value of our home. To get an idea of how much this can benefit you when dropping mortgage insurance, let’s say you had a home worth 350k and then you buy solar panels which boost the value of the home by 15k. That’s an easy low-risk way to increase the equity in your home by over 4% using an investment that more than pays for itself in the long run.
I found a solar company that offered free LED light bulbs for the whole house as a perk for purchasing through them. I ended up settling on a small 2.97 kW system for $13,514 dollars installed and got a 12-year loan at 1.99% for it. Though I could have purchased a much larger system.
The idea was to get a system big enough to keep me from the more expensive electricity tiers and to maximize my state’s solar tax credit. Utah offers a tax credit of 25% of the purchase price up to $2000 max. When you couple that with the federal tax credit. (30% through 2019) The total cost of the system ends up at only $7,460. Take into account the LED light bulbs and the reduced monthly electricity costs and this is a killer deal.
Use your solar credits to build even more equity, check this scenario out. Let say you buy solar panels towards the end of the year, within a few months you submit your tax return and receive the solar tax credit. Put that $6,000+ down on your mortgage giving you another big equity boost. In this way Solars panels are essentially working as a two-way equity boost. Helping to Increase the value of your home and lowering your mortgage amount at the same time!
As luck would have it I received a letter in the mail during the solar panel purchasing process advertising a true no cost refinance at 3.5%, at the time my interest rate was 3.75%. There was no downside to pursuing the no cost refinance, best case scenario, I would be able to lower my interest rate and drop my mortgage insurance premiums! Worst case, my house wouldn’t appraise for enough to drop the mortgage insurance but I would still be able to drop my interest rate. I needed to jump on the opportunity as soon as possible to lock in the 3.5% percent because mortgage rates change often. I locked in the rate and got the refinance started. At the time I was just hoping that my solar panels would be installed by the time the appraisal was done for the refinancing, and fortunately, the solar panel installation beat out the refinance by about a week.
Thanks to the solar panels and housing market gains over the previous 6 months since we purchased the house, our appraisal came in with more than enough value giving us the equity we needed to drop our mortgage insurance premium.
With a lower interest rate, and not having to pay insurance; the refinance saved us $179.34 a month on our mortgage payment!
I bought a house with 10% down and within 8 months dropped the Private Mortgage Insurance. Was luck involved? Yes, to an extent. I was fortunate to have favorable market conditions and interest rates. The no cost refinance gave me an opportunity to drop my mortgage insurance with no risk. If I had to pay for the appraisal myself I would have been leerier and would have waited another 6 months or so to pay off more principal before feeling comfortable enough to move forward.
Why am I telling you this? Is it just to brag? No, It’s because I believe that my experience can be beneficial in helping those who currently have mortgage insurance, or for those who may be looking to purchase a home in the future.
Maybe you find the perfect house, a great investment but you can’t quite afford to put 20% down. Remember you have these options available to you, PMI is not something that has to stick around forever and break the bank.
4 tips to dump your Private Mortgage Insurance
- No Cost Refinance
Mortgage rates are constantly fluctuating and there will always be banks fighting for your business. Seek out opportunities for no cost refinances, that will save you money on the appraisal and could even lower your interest rate! If that doesn’t work out be prepared to pay for an appraisal once your have enough equity. The appraisal will quickly pay for itself once you’re free from PMI.
- Solar Panels
Utilize solar panels as a way to increase equity in your home, the fact the monthly payment on a solar loan can often be entirely offset by savings in electricity costs make it a very safe, low-risk investment.
- Solar Tax Credits
Find out if your state offers any solar tax credits in addition to the 30% federal credit. use your solar tax credit to pay off additional principal further boosting your equity, putting you on the fast track to PMI freedom.
- Attack that loan balance
Have an attack dog attitude, don’t allow yourself to get complacent with the status quo, take charge of your financial future, make a plan and stick to it!
Be aware of these 6 things
- Not all appraisers are familiar with solar panels Solar Panels are pretty new and some appraisers are not too familiar with them, or how much value they bring to the house. When our house was appraised the appraiser company called to ask to gather information about our solar panels, he verified that we, in fact, owned them. (I would never rent instead of buy, but Apparently renting Solar Panels is a thing) And also asked about the size and cost of the system. I suspect there will be a good deal of variance on how much value an appraiser believes your solar system brings to the home. So you may want to call 2 or 3 local appraisal companies to get an idea, but the bottom line is that they do add value to your home.
- Buying before you can do 20% down is not for everyone I am in no way endorsing buying a home with less than 20% down, that is the safest way to go. If you do buy a home with less than 20% down make sure that you are able to save enough every month to pay your mortgage principal down to that 20% mark within a reasonable time frame. (12-18 Months was my expectation) Remember the possibility that housing prices could drop, causing you to keep PMI much longer than you planned. So make sure going into the home purchase that you accept the possibility of keeping it for the long term while knowing that you will do everything under your control to get rid of it. Make sure that you have 3-6 months worth of living expenses. Completely depleting your savings in order to make a bigger downpayment is not worth the risk.
- Solar panels are not all created equal Make sure you are investing in quality, high-grade silicon solar panels. Quality Solar panels should have at least a 30-year life expectancy and at least a 20-25 year warranty.
- It’s possible to have too much solar credit To take full advantage of the federal solar tax credits you need to have paid at least the full credit amount in taxes over the year. I have heard that you can collect these credits over two years if you didn’t pay enough taxes to claim the full credit. See a tax professional if needed.
- Plan When I refinanced I had a significant amount of money tied up in an escrow account at the old bank. It took over a month to get the check in the mail. The new bankrolled about a year of escrow costs into the new loan. If I had wanted to keep my loan amount the same with the new bank I would have needed to tell them ahead of time and paid for the escrow costs out of pocket while waiting for the previous escrow reimbursement check to come.
- Other Options Know that there are loans out there that come with no PMI, the trade off is that they come with a higher interest rate. For me, as someone who intends to get rid of PMI as soon as possible, I’ll take the lower interest every time.