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Refinancing Mortgage to Get Rid of PMI

Get Rid of PMI

Refinance mortgage to remove PMI.

Dropping the PMI

PMI, or private mortgage insurance, is what many mortgage borrowers are forced to purchase as a guarantee to the lender that payments will be made even if there is a default. It’s basically extra insurance on the part of both you and the lender. Should you not be able to pay your mortgage, the PMI will cover the missed payment for you. In addition, such a practice also allows you to buy a home you would otherwise not qualify for. This means you can purchase homes without have the entire 20% down payment.

Conventionally, you only need to have a PMI until your loan-to-value ratio reaches 80%. This LTV is the amount of money borrowed divided by the value of the purchased property. For instance, if you purchased a home worth $300,000 and put in 10 percent, or $30,000, that means you would need to get a loan worth $270,000 to pay the rest. The LTV is then $270,000 (the amount of money borrowed) over $300,000 (the property’s value), equaling 90 percent. As with most loans, the longer you pay off the mortgage, the lower this number becomes. Even still, PMI is incredibly expensive, costing thousands of dollars over the course of a few years. To reduce this, refinancing can mean the difference between saving up or spending on bills.

The Cost of PMI

Even if you aren’t able to have the PMI cancelled through a different means than refinancing, this does not mean you should simply let it be. PMI’s are not entirely beneficial. They are very expensive with costs ranging from about 0.5% to 1.0% of the entire amount of the loan per year. With most homes costing well over $200,000, this equates to a second car payment. To determine if cancelling PMI is right for you, simply do the math. Calculate how much you currently pay for PMI versus how much you would pay for a new loan. If the potential new loan is lower, it’s time to think about cancelling the PMI through either conditional terms or refinancing.

Cancelling PMI

Before refinancing, do your research. Refinancing is not something to be done at the spur of the moment. Instead, first look into the regulations regarding your PMI. It could be that you are allowed to cancel it in another fashion. For most, so long as 20% of the property value has been paid back, the PMI can be canceled. Unfortunately, various factors can prevent this from happening, such as the PMI changing insurers or contract stipulations requiring it to be paid over the course of a set time period.

Refinancing to Cancel PMI

Keep in mind that in order to refinance, the house will need to be appraised by the potential lender. This is to verify that the house has not decreased in value over the time you’ve owned it. If it turns out the property has increased its value such that the new loan will cover less than 80% of the property value, then there will be no need for PMI. No one should be paying PMI a full decade after purchasing their home. Find an experienced mortgage broker to help you figure out your best refinancing options.

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