Private mortgage insurance is an additional insurance premium that you may have to pay when you get a home loan. Typically, you must pay for PMI when you buy a home with a small down payment. Depending on the terms of your loan, you could have to pay PMI for a long time, even after building equity.
If you want to remove PMI from your loan, refinancing is one option. Before refinancing to remove PMI, it’s important to consider the pros and cons.
- PMI is an additional monthly cost you must pay when you get a conventional mortgage with a small down payment.
- PMI gets removed automatically when your home equity reaches 22%. Refinancing can let you remove PMI sooner than that.
- Consider all the costs associated with refinancing before you decide to do it.
What Is Private Mortgage Insurance?
PMI is a type of insurance that your lender may make you pay for when you get a conventional mortgage. PMI doesn’t protect you. Instead, it protects the lender if you default on your loan. You typically pay for PMI as part of your monthly mortgage payment.
Lenders usually require PMI when you make a down payment that is less than 20% of the home’s purchase price. A smaller down payment means the lender takes on more risk by offering the loan. Requiring PMI helps it compensate for that risk.
Depending on the type of loan you have, there are different ways to remove PMI from your monthly payment.
Can You Refinance To Remove PMI?
It’s possible to refinance to remove PMI from your mortgage, but that doesn’t mean it can be done immediately. You’ll need to qualify for a loan without PMI, which could mean building more equity in your home or using a loan program that doesn’t require PMI.
Options for Refinancing To Remove PMI
Refinancing your mortgage means getting a new loan and using the funds to pay off your existing one. This gives you the chance to change the details of your mortgage, like extending or shortening your repayment term, receiving a different interest rate, or getting rid of PMI.
If you want to refinance your mortgage to remove PMI, there are a few ways to do that.
Refinance once you reach 20% equity
The most basic way to remove PMI by refinancing is to wait until you have 20% equity in your home. Usually, PMI is required only if you buy a home with a down payment under 20% — meaning you start out with less than 20% equity. If you refinance after you reach 20% equity, your new lender won’t require PMI.
Remember, you can gain equity by paying down your mortgage and through appreciating home values. Home values tend to increase naturally over time, which means you could reach 20% equity and get out of PMI payments sooner than expected.
Refinance with a government-backed loan
Some government loan programs don’t require mortgage insurance. If you qualify for and refinance using one of these programs, you can avoid mortgage insurance even if you don’t have sufficient equity.
For example, loans backed by the Department of Veterans Affairs and the U.S. Department of Agriculture allow you to borrow 100% of the value of a home without having to pay for mortgage insurance. Refinancing with one of these programs will let you get out of mortgage insurance payments regardless of how much equity you have.
However, you must pay either a VA funding fee or a USDA guarantee fee. The VA funding fee is a percentage of your principal determined by how much you put down. The USDA guarantee fee is an upfront payment of 1% of the loan amount, and 0.35% annually.
Loans backed by the Federal Housing Administration require borrowers to pay mortgage insurance premiums, known as MIP. MIP essentially functions the same as PMI, but unless you put at least 10% down, MIP must be paid throughout the life of your FHA loan. If you have a minimum 10% down payment, MIP will be canceled after 11 years. FHA loans also require upfront MIP equal to 1.75% of the mortgage.
Take out a piggyback loan
A piggyback loan is a second mortgage, usually a home equity loan or home equity line of credit, that you apply for and receive alongside your primary mortgage. You can avoid PMI this way by using the funds from your piggyback loan to help make a down payment.
Let’s say you want to buy a home that costs $500,000, and you have $50,000 to offer as a down payment. That’s only 10% down. To avoid PMI, you could get a piggyback loan for another $50,000, and offer a $100,000 down payment — or 20% down — instead.
You could do the same when refinancing. A piggyback loan can increase your equity and help you avoid PMI. Just keep in mind that this will leave you with two monthly payments to make, and it might not save you money in the long run.
Refinance to a NACA mortgage
The Neighborhood Assistance Corporation of America is a nonprofit organization that helps people who have trouble getting traditional financing purchase homes. There aren’t specific eligibility requirements, but low-income borrowers are prioritized when it comes to getting a loan. NACA mortgages offer below-market rates, and have no down payment requirement and no mortgage insurance payments.
If you’re eligible, refinancing to a NACA mortgage can help you eliminate PMI payments from your loan. While NACA doesn’t typically refinance mortgages, it may be willing to if you have a land contract or lease-to-purchase loan.
Keep in mind that there are drawbacks to NACA loans. You can borrow no more than $484,350 — or $726,525 in some high-cost areas — to buy a single-family home. You also must go through a homebuyer workshop and qualification program.
Alternative Ways To Remove PMI
Refinancing is just one way to remove PMI from your mortgage. Here are some alternative ways to remove PMI:
- Wait until your loan-to-value ratio is 78%. Lenders must remove PMI from your loan when you pay down your mortgage to the point where you have 22% equity based on the purchase price of the home.
- Wait until the halfway point of your amortization schedule. Even if you don’t have a 78% LTV ratio, your lender must cancel PMI after you reach the midpoint of your loan term.
- Request to cancel PMI when your LTV ratio is 80%. Once you reach an 80% LTV ratio — or 20% equity — you can submit a request to your lender to ask it to cancel PMI.
- Pay down your mortgage earlier. If you make additional principal payments on your mortgage, you’ll pay down its balance more quickly. This can help you hit a 78% LTV ratio sooner.
- Get your home reappraised. If you think your home has increased in value, requesting an appraisal can get you documented proof of its current worth. If the increase is sufficient to let you reach 20% equity, then you can ask your lender to cancel PMI.
- Make home improvements. Making the right improvements to your property can help boost its value and increase your equity. Keep in mind that you might need to order an appraisal to convince your lender to remove PMI.
Factors To Consider When Refinancing To Remove PMI
Refinancing could help you remove PMI, but there’s more to consider than just eliminating that monthly cost. You should look at a few other things to determine if refinancing your mortgage is a good idea.
Just like when you got your original mortgage, you’ll cover various costs of refinancing, such as:
- Application fees.
- Origination fees.
- Appraisal fees.
- Mortgage points.
“One common pitfall is not considering the overall costs of refinancing,” says David Krebs, a Miami-based mortgage broker. “It’s crucial to calculate how long it will take to recoup the expenses through lower monthly payments. Additionally, make sure to review the terms of the new loan carefully to ensure they align with your financial goals.”
New mortgage rate
Getting a new mortgage means changing the interest rate on your loan. If your original mortgage has a high interest rate, this can be good news, especially if rates have dropped and your credit has improved. However, if you’re locked in at a low rate, refinancing means giving that up and spending more money on interest.
New loan term
When you refinance, you can select the term of your new mortgage. Depending on what you choose, that could mean shortening or lengthening the repayment period of your loan.
A longer repayment period can lower your monthly payment, which may feel like it’s saving you money. However, lengthening the repayment period also means paying more interest in the long run.
Some mortgages have a prepayment penalty, meaning you must pay a fee if you repay the loan ahead of schedule. If you refinance during the period when a prepayment penalty would apply, then you’ll have to pay this fee, which could eat into your savings from removing PMI.
When you expect to move
Given the upfront cost of refinancing, it can take months or even years before the lower monthly payment saves you money overall. If you’re thinking about moving soon, do the math before refinancing to see if going through the process will be worth it. How many months will it take to break even or come out ahead after refinancing? How long will it be until you sell?
Should You Refinance To Remove PMI?
Refinancing to remove PMI can work in some situations, but it’s key to crunch the numbers and make sure you’ll save money.
For example, if you’re a year away from getting out of PMI just by making normal mortgage payments, refinancing to remove PMI sooner probably isn’t worth doing. If you’re paying $150 a month in PMI, you’d need to find a way to refinance with closing costs under $1,800, or refinance to a loan that’s much cheaper overall.
“You don’t need to refinance in order to remove PMI,” says Jesse Gonzalez, president of True Blue Lending, a North Bay Village, Florida-based lender. “If rates are less than what you originally have, it would be worth it to refinance in order to eliminate the mortgage insurance and lower the rate, but be careful of restarting the clock.”
Extending the term of your mortgage may result in more interest paid over the life of the loan and increase its overall cost.
FAQ: Refinancing To Remove PMI
Here are answers to some frequently asked questions about refinancing to remove PMI.
PMI is a type of mortgage insurance that you pay when you get a conventional loan. It’s typically easier to get rid of than MIP, which is a type of insurance you pay when you get an FHA loan. MIP also involves both upfront and annual premium payments.
Yes, refinancing a mortgage can help you remove MIP from your loan. Refinancing from an FHA loan to a conventional one will eliminate MIP.
The Bottom Line on Refinancing To Remove PMI
Refinancing a mortgage is one way to eliminate PMI payments, but it’s important to look at the situation holistically. Think about how other aspects of refinancing — such as changing the repayment term or interest rate — will affect the cost of the loan. If refinancing still seems like the right move, make sure to compare different lenders to find the best deal.
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