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.
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
Refinance with PMI
- 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%
- 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
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.
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