When to Refinance to Get Rid Monthly Mortgage Insurance
For many home owners, private mortgage insurance or PMI is a necessity; if you lack 20% cash to put down for your house, then you will have to usually get PMI. Many people bought their home being required to have mortgage insurance, but people need to know when they can refinance with no PMI.
Private mortgage insurance protects the lender if you default on your mortgage, and it is not cheap: Expect to pay .75% to 1% of the loan amount per year in PMI. That adds up to many thousands of dollars over the life of the loan. However, you do not have to pay for PMI forever. Most consumers do not know how to get rid of PMI without refinancing, but out team will help you understand all of your options.
For home owners who have built up equity, you might be able to refinance your loan and lose the PMI payments. But when should you do it and is it a good idea?
Eligibility to Have PMI Removed
Before you start to think about refinancing your mortgage, first figure out if you are eligible or soon to be eligible to cancel PMI. See the latest options for a no PMI mortgage from competitive lenders.
PMI will drop off of your payment when your loan to value ratio hits 78%, based upon the home's value when you bought it. If your equity is approaching that level, it might make sense to wait until the lender cancels PMI instead of paying closing costs to refinance.
That said, if you have an FHA – government-backed – loan, things can be very different. Some Federal Housing Administration loans now have PMI for the life of the loan. The only way you can get rid of the insurance in that case is to refinance with a conventional loan. Typically, borrowers do not have to pay mortgage insurance if they refinance into a 15-year loan and their Loan to Value stays below 90%.
Combination of Equity and Appreciation
For those who have not yet made enough payments to cancel PMI, you still might be able to cancel those insurance payments without refinancing. Here's how:
If your home's value increased since you took out the loan. Your mortgage lender may be able to factor that in and cancel PMI. Some lenders will let home owners drop their PMI after the value reaches 80% through appreciation and amortization.
If you are sure that your home value has gone up, or you think that you are close to reaching 20% equity via payments, you have to get an appraisal. This will cost $300 to $400. If you do not know if your home's value has gone up that much, you also can just get an automated valuation of your home.
This is a computerized estimation of the value of your home. It will not substitute for a real appraisal when you refinance, but it will give you a decent idea of your home's value.
When to Refinance and Get Rid of PMI
If you cannot qualify for an automatic PMI cancellation, refinancing will help you to get out of PMI. You need to be sure that is worth doing, however. Any time you refinance, you have to pay a variety of fees:
- Title and escrow
- Document preparation
- Attorney fees
To figure out if refinancing is an ideal option, you have to see if what you would save by ending PMI payments earlier is more than the costs of refinancing your mortgage. It is difficult to refinance out of a 100% LTV mortgage unless you meet the standards for a military mortgage. Generally, most lenders are looking for equity to refinance people without including P.M.I.
A good, easy way to get an idea of this is to simply divide the cost of your loan (all of the fees) by the monthly reduction in payment.
How to Refinance with No PMI
If you decide you want to refinance to get rid of PMI payments, you will want to get the best mortgage deal out there. The way to do so is not to just focus on the rate, but on the lowest fees.
Many homeowners do not realize that there is little difference between interest rates for various lenders. You should make sure that you obtain a complete listing of all costs and fees associated with a particular loan before you make a decision.
Below are some other refinancing tips that can make the process go more smoothly:
- Prep: To make the refinance process go faster, get your paperwork in order as soon as you decide to refinance. You will need your last two years of tax returns, W-2s, and bank statements.
- Act fast: After you have locked in a refinance rate, you need to get all documents back to the lender as soon as possible. Mortgage underwriting is a first in, first out business. The person who gets their documents in the fastest is served first.
- Talk to your lender: Underwriters often ask for more information when they get your file, so stay in touch.
- Expectations: Ask your lender at the beginning for a timeframe on when they think the refinance will close. Most people can lock in their rate for 30 days. If the loan does not close within 30 days, you may have to pay a fee, or go with whatever the new rate is.
- Shop: There are some lenders out there that offer no-closing-cost loans and others than offer 30 day closings. Interest rates fluctuate so you should check the refinance mortgage rates today. You should at least consider going outside the big banks and see if a smaller lender is an option. Consider a 40-year mortgage to minimize the monthly payment.
Refinancing to get rid of PMI is something that many homeowners want to accomplish; it can save you $200 per month or more. Hopefully, after reading the above tips and guidelines, you will be able to successfully refinance soon.