Refinancing could help you get rid of mortgage insurance (MI). If you put down less than 20% on your original mortgage, you are probably familiar with MI, which protects the mortgage lender in case you default on the loan.
Ending Mortgage Insurance
MI must automatically be terminated on a mortgage that was signed on or after July 29, 1999, when your mortgage balance has been paid down to 78% of the the original property value, according to the Federal Trade Commission. You can also request that MI be cancelled when your home equity hits 20%, which may involve getting an appraisal if you are relying on the home's appreciation to comprise some of that equity.
Are You High Risk?
Even if you have 20% home equity, your mortgage lender can deny a request to cancel MI if:
- You have a "high-risk" mortgage.
- You have been behind on payments during the preceding year.
- You have additional liens on your home.
Mortgage Refinance and Home Equity
Although many homeowners have struggled with falling home values, there are some people who may benefit from refinancing mortgages. Refinancing may be worthwhile for people who have consistently paid down principal on a mortgage and have not had huge drops in home value. They may find that a home appraisal shows that they have more than enough equity to cancel MI.
If you are unfortunate to have seen your home value drop, or are underwater on a mortgage, refinancing may not help with MI. In fact, if your current home loan does not include mortgage insurance, a refinance could actually result in MI if you don't have enough equity.
Refinance rates are so low that it is worth shopping for mortgage quotes. When you compare deals, make sure that MI is not included if you have home equity of 20% or higher.