For many home buyers PMI (private mortgage insurance) is one of those necessary evils of life. If you lack 20% down for a down payment, you usually need to pay PMI. But for many home owners, you are not usually stuck with paying for mortgage insurance forever. If you have equity in your home and have a conventional mortgage, you could be able to refinance and stop paying for PMI. But is it smart to do so?
Below is an overview of whether or not you should refinance your mortgage to lose PMI.
Private mortgage insurance is a monthly premium paid in addition to your monthly mortgage payment. It is necessary to pay this extra cost in most cases when you put less than 20% down on a home. The private mortgage insurance will pay back the lender if you were to stop making mortgage payments.
PMI costs depend upon the size of the loan, your credit score, payment history, type of loan, and other factors. For a $200,000 loan, people commonly pay between $150 and $200 per month for PMI. It is a considerable extra expense, which is why many people want to refinance to lose this extra payment.
Before You Get a Home Refinance for No PMI
But before you think about refinancing, you should figure out if you are even eligible for having PMI cancelled. In some situations, you could have it cancelled without refinancing at all.
On a conventional loan, federal law requires that PMI drop off automatically once the home owner has reached 78% LTV based upon the value of the home at the time the property was insured. If you are getting close to 22% equity, it might be logical to wait until the lender cancels your payments on their own.
These days, many home owners find that with home prices increasing, they are eligible for PMI cancellation sooner than they realized. In 2017, home appreciation was more than 6% on average in the US. Homeowners in some cities are finding that their home values may have soared 10% or even more.
If the value of the property has appreciated considerably since you got your mortgage, the lender may be willing to allow for this and cancel your PMI. Many mortgage lenders on conventional loans will let borrowers cancel PMI when the value is 80% through amortization and appreciation.
Home owners who are confident that their home value has risen or are near reaching 20% equity through their payments, it is necessary to get a new appraisal, which will run $300 to $500. If you do not want to spend that money, consider an automated valuation model online. While it is no substitute for an appraisal, it will give you a reasonable idea what the home can appraise for.
FHA Loan Prior to MI Changes
But for people who have an FHA loan, note that for the most part, these loans require you to continue paying for mortgage insurance even after you have reached 22% equity, unless you put down 10% or more when you bought the home. In the past in this situation, you could cancel your mortgage insurance on an FHA loan after 11 years, but FHA changed their rules recently. If you closed your FHA loan prior to these changes then you are grand-fathered in for the MI elimination.
That is a big reason why you may want to think about refinancing, with an FHA loan, if you have good credit and you are confident you have at least 20% equity. There is little reason to continue to pay for mortgage insurance with an FHA loan for years and years when you have more than 20% equity.
One consideration however would be if you have a very low interest rate below 4%. As of mid-year 2018, interest rates have reached record highs for the past six to seven years. While still historically low at 4.6% or so, people who have rates under 4% from a year or two ago would need to think long and hard if it is financially worth it to refinance a loan with such a bargain basement rate.
While the only way to get out of FHA mortgage insurance these days for most people putting down less than 10% is to refinance, it may not be a financially wise move.
Should You Refinance?
If you cannot get automatic PMI cancellation through making payments or through appreciation, you need to weigh if the cost of refinancing is worth more than what you will save with not paying for mortgage insurance. A good way to get a rough idea of these numbers is to simply divide what the loan costs by what the monthly reduction will be in your payment.
For those who do decide to refinance to get rid of the mortgage insurance, you should ensure you are getting a new loan with low fees, and not just one with the lowest interest rate.
References: Understanding No PMI Mortgage Options