If you bought your home with a down payment of less than 20 percent, you're probably already paying PMI. PMI provides insurance for your lender in case you default on the loan. Though for some homeowners whose homes lost value during the housing crisis and haven't regained the previous value, PMI may add a new wrinkle to refinancing. Either way, there are a number of options for a refinance with PMI.
Your first step is to compare mortgage rates today with the mortgage rate on your current mortgage loan. Lower rates can help make a refinance a viable option even if you have to add PMI to your loan.
The other important piece of your refinance is to estimate your current home value. A lender will require an appraisal, but you can also ask a realtor or check recent home sales in your area to get a feel for what your home is worth and therefore how much equity you have.
If your home equity is nearly 20 percent, you may want to consider a "cash-in" refinance which requires you to pay down your mortgage loan balance. If your loan-to-value is less than 80 percent, you can avoid paying PMI.
Three ways to pay PMI
If you prefer not to pay down your loan balance and are concerned about the cost of refinancing, you can estimate your loan fees and mortgage payments for various PMI choices with a calculator.
1.Pay your PMI fee up front. If you have the cash, many lenders allow you to pay your PMI in a lump sum at your closing on your new mortgage loan. Another option is to add the PMI premium in a lump sum to your mortgage balance and to repay it as part of your monthly mortgage payment. According to MYFICO.com, the lump sum PMI payment will be about 2.2 percent of your home's value.
2.Pay your PMI monthly. Many homeowners choose to pay PMI in monthly installments along with their mortgage payment. While this increases the size of your payment, if you refinance into a lower interest rate, your payments may still decrease. In addition, these PMI payments will be dropped once your loan-to-value reaches 78 percent. PMI payments are tax-deductible depending on your income.
3.Choose lender-paid PMI. Your lender may offer you "lender-paid" PMI, which means you'll pay a slightly higher interest rate for the life of your loan and your lender will pay the PMI premium and get reimbursed by your higher rate. When current mortgage rates are low, this can be a good option since your interest rate is likely to be lower than the interest rate you are currently paying.
Discuss all your options with a lender before you refinance to determine which method of PMI payments is the least painful and which fits best into your overall financial plan.