Refinance guide removing PMI by refinancing
Removing PMI by Refinancing: What it Is and When It Makes Sense
Private mortgage insurance (PMI) is an added monthly charge that conventional lenders require when a borrower’s down payment or equity is less than 20% of the home’s value. “Removing PMI by refinancing” means replacing your existing mortgage with a new loan that doesn’t require PMI—commonly because the new mortgage has a loan-to-value (LTV) of 80% or lower, or because you refinance into a product that doesn’t carry borrower-paid mortgage insurance.
This option makes sense when you have built enough equity (typically 20% or more), current market interest rates are competitive or lower than your existing rate, and the savings from eliminating PMI exceed the costs and fees of refinancing within a reasonable period.
Benefits and Drawbacks
- Benefits
- Lower monthly payment by eliminating the PMI component.
- Possible lower interest rate on the new loan, increasing savings beyond PMI removal.
- Opportunity to change loan term (shorten to pay off faster or lengthen to lower payments).
- Refinancing out of FHA or other MI structures that are costly or non-cancelable in certain cases.
- Drawbacks
- Refinances involve closing costs (appraisal, title, origination) that can offset monthly savings.
- You may reset your amortization schedule, which could slow principal paydown if you extend the term.
- Credit score, debt-to-income, or changes in property value may disqualify you or increase your rate.
- Some lenders offer lender-paid mortgage insurance (LPMI) that removes borrower-paid PMI but may raise your interest rate.
Costs and Fees to Expect
Refinancing typically incurs the following costs:
- Appraisal fee (often $300–$700 depending on market).
- Application and credit report fees.
- Origination or underwriting fees (often 0.5%–1.5% of loan).
- Title search and insurance, recording fees, and other closing costs (total commonly 2%–5% of the loan amount).
- Prepayment penalty—rare but possible if your old loan has one.
Keep in mind some lenders offer “no-closing-cost” refinances where costs are rolled into the rate or loan balance; this reduces upfront cash but usually results in a higher rate or loan principal.
Step-by-Step Process
- Estimate your equity and target LTV. Get a current estimate of your home’s value (recent comps, online tools, a formal appraisal) and calculate LTV: loan balance ÷ current home value.
- Check current interest rates and your credit profile. Obtain rate quotes from several lenders and pull your credit report to ensure no surprises.
- Run the numbers. Calculate monthly savings from removing PMI and any change in interest payment. Compute break-even months: total refinance costs ÷ monthly savings.
- Choose the right refinance product. Options include rate-and-term refinance (to remove PMI), cash-out refinance (which may increase LTV and not help), or refinancing from FHA/MIP into conventional to eliminate FHA mortgage insurance.
- Apply and submit documentation. Provide income, asset, employment, and property information as requested.
- Appraisal and underwriting. Lenders will often require an appraisal unless they grant a waiver. Underwriting verifies income, assets, and property value.
- Close the loan. Review closing disclosure for all fees and the new payment. Sign documents and complete the refinance; PMI should end if your new LTV is ≤80% or the new product lacks borrower-paid MI.
Common Pitfalls to Avoid
- Ignoring closing costs: Don’t assume monthly PMI savings guarantee overall savings—include all fees in your calculation.
- Overlooking appraisal risk: If the appraisal comes in lower than expected, you may not reach 80% LTV and the refinance won’t remove PMI.
- Choosing the wrong product: A cash-out refinance increases your loan balance and may keep or increase PMI obligations. LPMI can remove monthly PMI but often at a higher rate—run the math.
- Resetting the loan term unintentionally: Refinancing into a 30-year loan when you were far along a 15- or 20-year loan can increase interest paid over the life of the loan even if monthly payments drop.
- Waiting for slow equity growth: If you plan to refinance because of expected market appreciation, be aware markets can move the other way and delay your break-even point.
Short FAQ
Q: Can I remove PMI if I have an FHA loan?
A: FHA loans use mortgage insurance premiums (MIP), which often cannot be canceled in the same way PMI can. You can remove FHA MIP by refinancing into a conventional loan that has ≤80% LTV—if you have sufficient equity and qualify for the conventional refinance.
Q: How much does PMI typically cost?
A: PMI premiums for conventional loans commonly range from about 0.3% to 1.5% of the original loan amount per year, depending on credit score, down payment/LTV, and loan type. That translates to several hundred dollars monthly on many loans.
Q: Do I need exactly 20% equity to refinance out of PMI?
A: Generally lenders look for a post-refinance LTV of 80% or less to avoid borrower-paid PMI. Appraisals or automated valuation models determine the allowed LTV. Some programs or lender overlays may require a slightly lower LTV or stronger credit.
Q: What’s a quick way to tell if refinancing to remove PMI is worthwhile?
A: Calculate monthly savings (old payment minus new payment without PMI), then divide total refinance costs by that monthly savings to get break-even months. If your break-even is shorter than the time you plan to stay in the home, refinancing can be a good idea.
Refinancing to remove PMI can deliver meaningful monthly savings, but the decision hinges on the balance between closing costs, interest-rate changes, and how long you’ll stay in the house. Run the numbers, compare multiple lender offers, and watch the appraisal and loan terms closely to avoid surprises.
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