What is the Benefit?
Homeowners who put less than 20% down payment when purchasing a home have to pay PMI (private mortgage insurance) as part of the mortgage payment (approx. $100-400 per month). There are two ways for homeowners to eliminate PMI:
1. Wait Till You Pay Down the Loan Balance
When the loan balance reaches 80% of the initial purchase price or if the current value of the home puts the current balance at 78% or less of the appraised value, homeowners can petition their existing servicer to remove PMI from their monthly payment.
This is not an easy path because there may be seasoning requirements or other complex rules in place that render this option impractical (due to red tape).
2. Refinance to Remove PMI
With home values at an all time high (up more than 30% in some parts of the country over the last 12 months), many homeowners opt for a refinance as a sure way to remove PMI because no consent from the servicer is required. The new lender will make a loan without PMI assuming the new appraised value puts the loan at 80% or less.
This option has no seasoning requirements or any other red tape. If the home appraises at a sufficient value, the new loan will not have PMI.
In addition, if at the time of the refinance, interest rates are lower compared to the existing rate, then homeowners will also realize additional monthly savings due to the lower interest rate.
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