Thursday, December 29, 2005

Do you need to refinance to eliminate PMI?

Private Mortgage Insurance (PMI) is one of the most avoidable expenses that home owners experience. Your bank will charge you PMI if your mortgage balance exceeds 80% of the appraised value of your home. Most folks who get hit with this expense are just entering financial adulthood and don't know that it's easily avoidable.

You can avoid this expense up front by combining a 80% first mortgage with a Home Equity Line of Credit or Home Equity L0an. This is the best strategy to take when you are in the home buying process.

If you've already made the PMI mistake, here's your plan of action:

  1. Determine if you are below 80% LTV (Loan to Value) based on the original purchase price of the home. Hopefully you remember what you paid for your house... just divide your remaining mortgage principle (found on your mortgage statement) by the purchase price. If this number is below 0.80, you have a great case for calling your lender and demanding that they cancel the PMI. If your purchase price LTV is > 0.8, go to step 2.
  2. Determine if your current appraised LTV is less than 80%. This is a bit more difficult and will take some research and, potentially some expense. If you can justify to your mortgage company that your property has appreciated enough to drive your LTV under 80%, they are required by law to cancel the policy.
  • The easiest approach is to simply call and, if necessary, beg your mortgage company to cancel the policy
  • If that doesn't work and you're pretty confident your house as appreciated enough, get an appraisal from a state licensed appraiser... by law your mortgage company must accept the result.

If you still don't have a LTV below 80%, you may need to look into getting a HELOC and paying-down your primary mortgage. Just make sure you shop around and watch-out for any and all extra fees... you should be able to find HELOCs at or below the Prime Rate and without any application or annual fees.


At 3:23 PM, Blogger Dus10 D said...

Doing this typically, but not always, brings additional fees or higher interest rates on the secondary line of credit. There is also another option for paying the entire PMI premium up front, and have the interest as a tax deduction. I outline it in my PMI Options post.

At 10:31 PM, Anonymous Anonymous said...

If an appraisal on a home I am purchasing is 450k and the purchase price is 310k. Do I still have to pay PMI if I put no money down>

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At 1:51 AM, Blogger Sara said...

Many homeowners have to go for private mortgage insurance (PMI) while they take out a home loan. This is mainly because they are unable to pay the required 20% down payment. However, it should also be noted that it is possible to eliminate the PMI. If you have more that 20% equity in your property, then you will be able to eliminate the private mortgage insurance or PMI. FHA loans are not required to drop PMI. If you have an FHA loan, expect to keep paying PMI for at least 5 years and until your LTV is less than 78%. Refinancing a home loan to cancel PMI may be the best option for you.

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