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Refinancing Could Result in Mortgage Insurance

Posted by  on Oct 08, 2009
 

Current mortgage rates are low enough that you may be thinking about refinancing. But if you've lost a lot of equity due to falling home values, you could end up with mortgage insurance (MI) payments in addition to principal and interest. So you'll need to run the numbers to make sure a home refinance really saves you money if you have to pay MI.

What Is Mortgage Insurance?

Mortgage insurance protects the lender in case you default on your mortgage loan. You are required to pay MI if you buy a home with a down payment that is less than 20%. When you refinance a home, your lender will look at how much equity you already have when underwriting the loan. If your home equity is below 20%, you'll either need to make a cash payment to boost your equity or accept mortgage insurance.

Estimating Mortgage Insurance

What you pay for MI is based upon the amount of the mortgage loan and usually runs one-half to 1% of the amount. For instance, if you get MI on a 30-year mortgage with a loan-to-value ratio of 90% (10% down payment) you'll pay about 0.52% for the insurance premium. In other words, if your mortgage is $200,000, multiply that by 0.0052 to get $1,040, then divide by 12 to get the monthly premium of $86.67. So you would add $86.67 to your principal and interest payment each month.

Current Mortgage Rates Are Low

Many lenders are turning down people who don't have a 20% down payment to purchase a home or at least 20% equity for a home refinance. That is largely because MI companies are becoming increasingly picky about who they insure and most lenders can't loan without the insurance. But even if you've lost equity, you may still be able to refinance. Compare current mortgage rates for refinancing here.

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