Mortgage rates rose 0.02% last week. But Getting Rid of PMI With Refinancing Can Still Save You Money
The average 30-year fixed rate mortgage rose 0.02% last week to 3.05%. While this is a slight increase, rates are still insanely low given that they haven’t been below 3% since February, according to the Bankrate Weekly Rate Survey.
Despite the low interest rates, you could end up having higher monthly mortgage payments if you are in the market to buy a home. This is because there is a housing shortage in many parts of the United States, which has resulted in an upward trend in house prices. Without a larger down payment to offset these price increases, those looking to buy a home may end up taking out a larger loan with a higher monthly payment.
You can look at similar homes that have recently been sold in your neighborhood to get an idea of ââyour home’s value and whether or not you have enough equity to remove the PMI.
But rising house prices can actually be helpful for existing homeowners – especially those currently paying for private mortgage insurance, or PMI. With a big enough increase in home values, existing homeowners can use the additional equity to refinance and not only get rid of PMI, but also take advantage of a lower interest rate.
Four Ways to Get Rid of PMI
PMI is an additional cost that lenders typically charge when the loan-to-value ratio is above 80%. In other words, the PMI could be charged for purchases where the down payment is less than 20%, or refinances when the loan amount divided by the value of the house is greater than 80%. Since homes with less equity are generally considered to be riskier for the lender, PMI is added to the loan to protect the lender in the event of default. Although the PMI is paid by the borrowers, it only benefits the lender. The PMI can be structured as a one-time upfront cost when obtaining the loan, an additional monthly amount added to your regular mortgage payment, or a combination of the two.
If a lender requires a PMI for your loan, be aware that there are ways to remove it:
- Wait for it to roll: Lenders are required to remove the PMI once your loan has been paid off at 78% of the home’s original value. PMI can also be removed after you’ve paid off the loan for more than half of its original term. So, for a 30-year loan, the PMI could be removed after 15 years of payments.
- Request cancellation: If you want to be more proactive in removing PMI, you can ask the lender to do so after you’ve paid off your mortgage balance at 80% of its original value. This figure is usually the lower of the original selling price or appraised value at the time of purchase.
- Refinancing into a new loan without PMI: Another common method to remove the PMI is to refinance into a brand new loan. This can be especially useful if your home has gone up in value. Many lenders require an appraisal to determine the value of your home and will determine the need for PMI based on the value of your current home. If the amount of your new loan divided by the current value of your home is 80% or less, the PMI will not be required on the new loan.
Refinancing to get rid of PMI
With rates as low as they have been, the savings you could make from refinancing can really add up. Assuming a typical PMI cost of 0.5% of the loan amount, NextAdvisor mortgage calculator shows how beneficial it can be for you to not only refinance at a lower rate, but also remove the monthly PMI cost.
Example: 30 fixed years, loan of $ 250,000 with and without PMI
|Interest rate||P&I monthly payment||Estimated monthly cost of PMI (0.5%)||Total monthly payment||Savings per month after removal of PMI|
|A loan with PMI||4.125%||$ 1,211||$ 104||$ 1,315||–|
|B loan without PMI||3.125%||$ 1,070||$ 0||$ 1,070||$ 245|
It is important to note that we considered a relatively low PMI cost at only 0.5% of the loan amount. Depending on your specific circumstances, it is possible that PMI will cost you more each month, in which case refinancing to remove PMI would save you even more money.
Don’t forget the closing costs
Refinances aren’t free, so if you’re considering refinancing your home to eliminate the cost of PMI, you’ll want to calculate your breakeven point to make sure it makes sense for your situation. To do this, add up the closing costs associated with the refinance and then divide it by the monthly savings on the new loan. This will give you the breakeven point in months, or how long it will take to recoup the costs of refinancing. Looking at this number can tell you how long you need to hold onto the home ownership to make the refinancing worthwhile in the long run.