How Does Refinancing Work

by CC from Bergen County, New Jersey

Ask Kate: How does refinancing work with PMI? Hi Kate, We are hoping to refinance but the private mortgage insurance (PMI) will sky rocket offsetting lower interest rates. We bought our house in 2008.


CC continues... With about 12 percent down payment, we needed PMI, which is $131 per month. Home prices in the area have dropped about 10 percent, so we are still nowhere near having 20 percent equity in the house to get rid of the PMI and don't have the cash right now to make it 20 percent.

We're paying our bill every month, no late payments. Our current rate is 5.9 percent and I know we can get at least a point lower. When I talked to my broker, he says he is able to get us a new rate of 4.75 percent.

But the PMI will then be more than doubled to $340, so we would have very little savings in our monthly payment, about $132 less per month. Seems crazy that PMI has increased SO much!

Is there a possibility that an FHA loan might work for us? We are not in dire straits, but our monthly payments are becoming increasingly a strain and a reduction would be extremely helpful.

Any thoughts or ideas would be helpful. Thanks so much for any insight!

How Does Refinancing Work With PMI

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

PMI! Hard to live with but in lieu of 20 percent equity, home ownership without private mortgage insurance is even harder!

In the past, 80/20 mortgages, now called exploding mortgages among other non-endearing terms, were designed to avoid PMI. Two loans, the combo mortgages combined to eliminate down payments and avoid private mortgage insurance.

Well intentioned subprime mortgage loans ended up carrying many risks for homeowners. So as the proverbial pancake flips, homeowners once again are attempting to live with PMI.

The cost of private mortgage insurance increases incrementally with loan to value ratios (LTV). When real estate values decline, PMI premiums go up, offsetting the benefits of today's magnificently low interest rates.

Ask your lending professional about these two solutions -- FHA refinance and HARP.

The very nature of FHA allows for less equity. So even though FHA home loans have two types of mortgage insurance, upfront MI and monthly MI, you should compare the FHA good faith estimate to the conventional monthly house payment and mortgage closing costs.

A second solution is HARP. Because many homeowners pay their mortgages on time but are still unable to refinance due to a decrease in real estate values, the Obama administration introduced HARP. This is one of the Home Affordable Refinance programs responsible for making the lowest interest rates in 30 years available to today's homeowners.

You'll find my answers specific to HARP, HAMP and loan modification questions here.

I have also included more PMI help at the bottom of this page. Be sure to check out my article How Do I Cancel PMI for ideas about getting rid of private mortgage insurance.

Best wishes,


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