It's important to mention that refinancing is not the only way to get rid of PMI. Here are some others:
- With a conventional loan, your lender is required to cancel your PMI at the halfway point of your amortization schedule, or when your mortgage balance has reached 78% of the home's purchase price -- whichever comes first.
- You can request PMI cancellation when your mortgage balance reaches 80% of the home's purchase price.
- If you've owned your home for five years or more, you may be able to reappraise the home (which usually costs between $300 and $500) to demonstrate that your loan balance is less than 80% of your home's current value.
All three of these apply to conventional mortgages only. If you have an FHA mortgage loan, different rules apply. It can be very difficult to get rid of FHA mortgage insurance without refinancing.
Is getting rid of PMI enough reason to refinance?
Possibly. But if you have a low interest rate, you need to weigh the cost of higher rates against the savings of eliminating private mortgage insurance to determine if it's worth refinancing your home loan to get rid of PMI.
Also, remember that refinancing isn't free. You'll likely have to pay:
Costs can vary dramatically among mortgage refinance lenders, but expect to pay a few thousand dollars to refinance. The question to ask yourself is, "Will the savings from refinancing outweigh the costs?"
Let's say you're paying $200 per month for PMI. You refinance with the exact same interest rate -- but without PMI -- for $6,000 in closing costs. You'll save $200 per month this way. In 30 months, you'll have saved $6,000, the same amount you paid to refinance. It's only after that you'll start seeing the benefits of getting rid of PMI. So, as long as you're planning to stay in your home for longer than that, it could make sense.
Of course, a real-world situation will likely be a bit more complex. The refinancing rates you're offered may be higher than your current interest rate. And if you replace a mortgage you've been paying down for years with a fresh 30-year loan, you should consider the difference in payoff length.
Is refinancing to end PMI a smart choice for homeowners?
Generally, yes, but only if your overall savings outweighs the costs. Like most major financial decisions, refinancing to get rid of PMI depends on your situation.
If you're able to get rid of PMI by refinancing (and it will save you enough money to justify the cost), refinancing can certainly be a smart choice.
Be sure to consider interest rates, how long you plan to stay in the home, the fees and other costs of refinancing, and other relevant factors before making your decision.
Still have questions?
Here are some other questions we've answered: