Ask Kate About Hidden Cost of PMI

by Krish from Glendora, California, USA

Ask Kate about the hidden cost of PMI (Private Mortgage Insurance): Hi Kate, I am refinancing my home that I bought in 2010. I do not have any money towards down payment to drop the LTV to 80%. So, I am thinking of refinancing with the addition of PMI. Borrower paid PMI, that is.


Krish continues... I do not want to pay impounds though, as I am more comfortable with paying taxes and insurance on my own.

I am thinking that if I take private mortgage insurance and my monthly payment with PMI is equal to or less than what I am currently paying ($1,672), then I should go for this refinance. Because I get a chance to drop PMI payment the moment my home appreciates to drop the LTV to 80%, which I expect pretty soon.

Do you think going for this refinance with PMI is a good idea? How much do you think I should be paying for PMI? Here are the details on my original home loan and the refinance I am considering. Please advise.

Original Mortgage for Buying My Home

  • Closing Date - Jan 2010

  • Purchase Price - $415,000

  • Loan Amount - $332,000

  • Loan Type - Conventional 30 year fixed rate mortgage

  • Mortgage Rate - 4.5%

  • Monthly Payment - $1,672

  • PMI - None

  • Loan-to-Value - 80%
Refinance with PMI
  • Current Appraisal - $390,000

  • Current Loan Balance - $325,000

  • Loan Type - Fixed for 30 years, no mortgage closing costs

  • Refinance Rate - 4%

  • Monthly Payment - $1,552

  • Loan-to-Value - 83.33%

  • Credit Score - 750

Kate Answers: Hidden Cost of PMI

***zz-portrait-left.shtml*** Dear Krish,

Before you decide one way or the other about refinancing with PMI, I want you to take a moment to think about this.

There is a hidden cost to PMI that's easy to sweep under the carpet. The hidden cost I am referring to is the difficulty that many homeowners run into when attempting to cancel their private mortgage insurance.

Real Estate Cycles Contribute to the Hidden Cost of PMI

When home values during the current cycle began to plummet, multiple real estate forums were asking when their local markets would return to normal.

Many did not realize the escalating values from the mid 90s to 2006 were no more the norm than the declining values of the late 80s. The fact is, real estate values rise at times, they drop, and other times they even stagnate. Not that different from mortgage interest rates, right?

On top of that, it can take years to enter into another cycle. So ask yourself what would happen if the value of your house does not increase as soon as you expect. Are you prepared to continue making monthly house payments with PMI?

Refinancing To Get Rid of PMI

I think to be pleased with your choice to refinance the mortgage, it should be based on the realization that you may have private mortgage insurance in your monthly house payments for an indefinite time.

In addition, if you decide to incur the cost of this mortgage refinance (I would not consider this a no-cost refi if you are adding PMI), please prepare yourself for using more of your equity for mortgage closing costs when you decide to refinance yet again to eliminate the Private Mortgage Insurance.

Cancelling PMI & PMI Pricing

In case you are wondering why I seem to be overlooking the fact that you can request the lender to cancel your private mortgage insurance, you will understand when you go to my pages --

1. How Do I Cancel PMI - Part I

2. How Can I Cancel PMI - Part II

Think it sounds, hmmm... complicated to cancel PMI? Consider how each of those points have several hoops for you to jump through and additional loopholes which allow lenders to continue enforcing the PMI requirement.

To answer your question about PMI pricing, please refer to my article at How Do Mortgage Lenders Calculate My PMI.

One last thing based on your comment about property taxes and homeowner's insurance... Most mortgage lenders require that your property taxes and homeowner's insurance are included in the monthly house payments after you have borrowed more than 80% of your home's appraised value.

Comment & Link

Krish, I wish you the best in your decision making. You (or anyone else reading this) can comment on Ask Kate about Hidden Cost of PMI. Or Ask Kate another question.

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Best wishes,

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by: Simon from Moline IL 61265

My question is regarding "home value" vs "original loan amount".

I understand that PMI is to protect the lender when borrowing more than 80% loan-to-value (LTV) on a purchase. To obtain the "home value" the bank orders an appraisal.

Would they not use the appraisal (current market value of home) to figure the 80/20 amount or do they base it on "loan amount", period. If they use the loan amount, why are they allowed to call it 80% LTV?

Hi Simon, Kate here. You are asking about cancelling PMI, right? If so, the formula for determining when private mortgage insurance can be cancelled is based on current loan balance divided by the lesser of the original appraised value or purchase price.

I suppose to be accurate, the proper term should be loan-to-original-value or LTOV! However, for now, we are stuck calling it LTV.

Keep in mind your lender may also require a current appraisal to determine that the value of your home has not decreased.

It's best to assume that the cards are stacked against a homeowner when PMI cancellation time rolls around. Not to say that homeowners never get rid of PMI. But in a declining real estate market, the process is going to be challenging, to say the least, and favors the lender.

Read the two methods for getting rid of PMI at How Do I Cancel PMI.

And as a precautionary measure, read Chris's story about what NOT to do when trying to get PMI removed at Getting Rid of PMI.

Thanks for asking about PMI. If I didn't answer your exact question, don't hesitate to ask again.


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You can also ask Kate about your mortgage at Refinancing Advice The Nuts and Bolts.

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