Clever Ways to Refinance Out of Paying Mortgage Insurance

Home interest rates are still affordable but home values are not appreciating as rapidly as they once were. If you got a conventional home loan and made a down payment of less than 20 % of the purchase price, you almost certainly had to pay for private mortgage insurance, or PMI. The policy reimburses your lender if you default on the mortgage.

"If you fall over a penny over 80%, you've got to do something about the PMI issue," says Richard Brooks, general partner for First Southeast Mortgage in Birmingham, Ala. Although the lender is the beneficiary of the policy, you pay for it. For someone who borrows $150,000 for a $180,000 house (a down payment of almost 17 %), mortgage insurance increases your payment between $40 and $50. The monthly cost varies, depending on the size of the mortgage and the %age of the down payment.

You can request that the lender stop charging for mortgage insurance after you have paid enough to have 20 % equity in your house, based on the home's value on the day you closed the loan. It can take a long time to achieve a 20 % ownership stake: more than eight years if you make a 10 % down payment and pay the minimum amount every month on a 30-year mortgage.

Another way to get rid of mortgage insurance is to ask to have your house appraised again. If the value has increased sufficiently, your current mortgage balance might be less than 80 % of the home's new value. In other words, the amount you owe hasn't changed, but it's a lower %age of the home's value because the value has risen.

The problem with getting your house reappraised to get rid of PMI is that it doesn't work during the first two years of the loan. Once you have to pay for mortgage insurance, you're stuck with it for two to five years, regardless of how rapidly the home's value appreciates. That's the policy of Fannie Mae and Freddie Mac, the two biggest purchasers of home loans.

Information can be referenced at Bank Rate


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