Refinancing to End PMI: A Deal or a Dud?

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. But is it a good idea?

Are you already eligible for a PMI cancellation?

Before you consider refinancing, determine if you're eligible -- or nearly eligible -- for an automatic PMI cancellation.

PMI drops off automatically once the loan-to-value ratio reaches 78% based on the value of the property at the time the policy was instituted, says Joe Parsons, senior loan officer for PFS Funding, a mortgage banker in Dublin, CA.

If your equity is nearing the cutoff, it may make more sense to wait until your lender automatically cancels your PMI payments rather than pay closing costs to refinance your loan. However, if you have a government-backed loan, things may be different. Many Federal Housing Administration loans now carry mortgage insurance for the life of the loan.

The only way to get rid of FHA insurance is to refinance into a conventional loan, Parsons says.

The equity and appreciation combo

If you haven't made enough payments to reach the automatic cancellation point, you may still be able to get out of PMI without refinancing.

If the value of your home has increased since you took out your loan, your lender may be willing to factor that in and cancel your PMI automatically. Many lenders will allow borrowers to drop PMI once the value has reached the 80% level through a combination of appreciation and amortization, Parsons says.

If you know the value of your home has increased, or you're close to reaching the equity point through payments, you'll need to order an appraisal to give to your lender, which will cost $300 to $450, according to Parsons.

If you aren't sure if the value of your home has increased and don't want to spend the cost of a full appraisal upfront, start with an automated valuation model.

"This is a computerized estimate of the home's value," Parsons said. "It is not a substitute for an appraisal, but it can give some advance notice of what the property may appraise for."

But, really -- should you refinance?

If you're not eligible for an automatic cancellation, refinancing will get you out of PMI, but you still need to make sure the cost is worth it.

There will always be charges for title and escrow, appraisal, underwriting, document preparation, and other third-party costs and fees, Parsons says.

To determine if refinancing is the better option, you'll have to determine if the amount you'd save by ending PMI payments earlier is greater than the costs associated with refinancing.

A quick way of getting an approximate idea of those numbers is to divide the cost of the loan (title, escrow, etc.) by the monthly reduction in payment, Parsons says.

Finding a good deal

If you do want to refinance, make sure you get the best deal by finding the lender with the best fees, rather than the lender with the best interest rate that day, Parsons says.

"There is very little difference in rates from one lender to the next," he said. "The consumer should get an itemized listing of costs and fees before making a decision on what lender to use. They should also be aware that rates change from one day to the next."

You also want to find a lender who is willing to go the extra mile for you.

"Just as the selection of a Realtor is important in a buyer's success, the same can be said about mortgage professional," Parsons said. "Any borrower should look for a mortgage person who returns calls, emails and texts promptly, answers questions fully and in plain language, and is highly knowledgable about different loan programs to meet their client's needs."

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