Information on PMI for Refinance Loans

Highlights

  • Learn who has to pay PMI.
  • Understand when you can cancel PMI.
  • Review when a lender is required to cancel PMI.
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If you refinance do you have to pay PMI?

private mortgage insurance (pmi) is not a cost that any borrower chooses to pay. instead, pmi is a type of insurance that lenders require some borrowers to take out, because it protects the lenders, not the borrower. if you default on your loan, private mortgage insurance pays the lender, protecting it from loss.

who pays pmi?

private mortgage insurance is a standard requirement for conventional loans where the borrower is financing more than 80% of the value of the home. even with a refinance, you will end up paying for pmi (private mortgage insurance) if you borrow more that 80% of the value of the home. for purchase mortgages,  lenders require pmi when the down payment is less than 20% of the asking price of the home.

there are a few problems, as far as a borrower is concerned, with private mortgage insurance:

  • it raises your monthly payment. if you are required to purchase pmi, the cost is figured into your debt-to-income ratio. this reduces the size of the loan that you can use for the home purchase or the size of the refi loan that you qualify for.
  • it is not tax deductible, unlike the interest that you pay on the money you borrow to buy a home or to finance a refinance loan on a traditional mortgage.

while it is distasteful to pay for it, private mortgage insurance helps the overall mortgage market. without it,  lenders would choose to lend to far fewer potential borrowers, afraid that their risk would be too great.

your costs for pmi are not based on your credit rating. the costs are based solely on whether your lender requires it or not. you can't shop around for cheaper pmi, as your lender will decide what company you will use.

cancelling pmi

pmi is not a cost you have to pay for throughout the life of your loan. you can eventually cancel private mortgage insurance, once your principal balance drops to  80% or less of your home's original purchase price or the amount you financed in a refinance loan. you may only be eligible to drop the pmi if you have been paying your mortgage on time. while it is up to you to contact the lender, if you want the pmi dropped once you reach 80%, most loans loans require the lender to drop the private mortgage insurance automatically, once your loan is at 77% of your original mortgage balance.  

The law does not require a mortgage servicer to consider the current property value, if your property rises in value. if your property does appreciate in value, then you should contact your lender to see if they are willing to drop the pmi.

if you are shopping for a loan, either to buy a home or to refinance an existing mortgage, make sure you are working with a knowledgeable loan officer and a quality lender. a good lender will factor in whether or not you are likely to need pmi, so you have an accurate idea of how much money you can borrow. use one of bills.com's pre-screened lenders, to find the right mortgage loan at the lowest cost.

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