Is Private Mortgage Insurance (PMI) Required for a Home Refinance?
Recent decreases in home values have left many homeowners with less equity than when they purchased their home. While lenders are typically willing to refinance a mortgage when the borrowers have at least five or ten percent equity, private mortgage insurance (PMI) is required on homes with less than 20% equity.
PMI is required by lenders in order to protect themselves in case of a default on a loan, in which case the PMI company would make a payment directly to the lender to cover their losses. Homeowners interested in refinancing who already make monthly PMI payments as part of their mortgage will expect to pay PMI again after a mortgage refinance, unless of course their home value has increased or they have paid down their mortgage so that their equity has climbed to 20% or more. Depending on your income level, PMI payments can sometimes be tax deductible.
Homeowners who have watched the value of their home decline may be surprised to find that they must add PMI payments to their home loan when they refinance. If you are not sure how much equity you have in your home (the difference between your home value and the amount you owe on your mortgage), you can try an online home value calculator or contact a local Realtor for a quick estimate of your current home value. An appraisal will be required when you refinance.
PMI and Refinancing
Even if your loan-to-value ratio has dropped, paying PMI should not stop you from refinancing your home. There are several alternatives available for homeowners with equity below 20%. In many cases, homeowners opt to refinance into an FHA loan since these loans have easier guidelines to meet for credit scores, debt-to-income ratios and home equity. However, FHA loans do carry both upfront mortgage insurance and monthly mortgage insurance costs for borrowers.
Conventional lenders sometimes offer mortgage borrowers a choice of “Lender Paid Mortgage Insurance” or “Borrower Paid Mortgage Insurance”.
· Lender Paid Mortgage Insurance means that the cost of the insurance is wrapped into your interest rate rather than paid as a separate charge, resulting in a lower monthly payment. However, this mortgage insurance cannot be cancelled until the home is sold or refinanced again.
· Borrower Paid Mortgage Insurance is added to your monthly payment as an additional fee, but this can be cancelled when your home appreciates or you reduce your principal to 80% of the home value.
No matter which choice you make for refinancing with less than 20% equity, be sure to carefully evaluate all your options including FHA loans and conventional financing.
