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Should I Refinance To Stop Paying PMI

You probably don't like having to pay more out on a monthly basis than you absolutely have to but, it's a reality you've come to accept -- to a point. As your home gains more equity, it comes closer to be worth enough to let you out of paying for private mortgage insurance or PMI. You might know that it's not insurance for your benefit, but for the lender, particularly because it does provide protection in the event you are unable to pay your mortgage.

What you might believe, due to a lot of misconceptions which float out in the nether, is that your PMI doesn't magically go away. Many people think that once their principal balance falls to 80 percent, private mortgage insurance detaches itself from their monthly obligation, but that's not the case. Most lenders require you go through a process in order to cancel PMI.

There are different ways to get into a position that allows you to cancel private mortgage insurance. One, of course, is to pay more into the principal to accelerate your equity position. Another way is to use savings or other assets to pay off part of the principal balance or you might consider refinancing to stop paying PMI. The latter shouldn't come as a whim and you'll need to fully understand how it works and what will result before you refinance to drop private mortgage insurance.

What to Know about Private Mortgage Insurance

Something you might not know is that there are types of home loans which require the borrower carry private mortgage insurance for the entire life of their loans. There is no cut-off point and the loan-to-value ratio isn't a factor, you're simply stuck with paying it or refinancing with a new debt instrument that allows you to drop PMI. For instance, if you currently have one of the many types of Federal Housing Administration loans, you're probably stuck.

"For many home buyers, private mortgage insurance is a necessary evil. If you don’t have 20% in cash to put down on a home, you’ll often be left with little choice other than PMI. But that doesn’t mean you’re stuck with the payments. If you’ve built up some equity in your home, you may be able to refinance your loan and end those PMI payments."

The way around that conundrum is to either pay the loan off in its entirety or to refinance to a conventional loan. Of course, if you don't have the cash for a complete payoff, your only option is to refinance with a conventional mortgage. Another thing you might or might not know is that private mortgage insurance does little to nothing for you -- it's a product that protects the lender. For instance, if you stop paying your mortgage and the lender forecloses, it might not get its money back from the PMI policy. In some situation, former homeowners have been sued by lenders when this occurs, though it's rare.

Should I Refinance to Stop Paying PMI?

First of all, understand that refinancing isn't "redoing" your current mortgage. It's applying for a new home loan, going through the entire process again, which means paying closing costs, undergoing an appraisal and most of what goes into buying a home. You'll have to apply for a new home loan, so your credit should be in good standing. One piece of good news is that the Fair Isaac Corporation just made changes to its credit score modeling, which does not put as much emphasis on medical debts. Another good bit of news is you already have a track record and equity. But, there are other considerations and here's what you should look at:

  • The refinance rate. Of course, if you are paying a higher interest rate, that's certainly a reason to refinance. For most homeowners, refinancing means getting a lower interest rate, which saves thousands of dollars over the life of the loan.

  • The true market value of your home. Depending on what your home appraises for, it might or might not be worth refinancing. Should you be located in a healthy local real estate market, it could be worthwhile to refinance. However, if the market is slow in recovering, you're probably better off waiting.

  • The timetable you are working under. Another consideration is the amount of time you'll be in your home. While it's always good to spend less on your cost of housing, if you're going to be moving in the next few years, you won't realize a gain by refinancing.

Last, but certainly not least, is finding a good deal and a good point person. You want a professional that is on-the-ball, returns phone calls and email and is honest and upfront with you. Shop around, and remember, interest rates change daily, which means you need to act when you find what you're looking for. You also always have the option to sell, instead of refinance, and move into another home.