Mortgage Insurance and Refinancing: What You Need to Know
Refinancing your mortgage can be a powerful tool for eliminating mortgage insurance or reducing its cost. Here’s what you need to know about the relationship between refinancing and mortgage insurance.
Refinancing to Remove PMI
If your home has appreciated significantly, refinancing can push your LTV below 80%, eliminating the need for PMI on the new loan. This strategy works best when home values have risen sharply in your area.
Refinancing from FHA to Conventional
This is one of the most common reasons people refinance. Because FHA MIP lasts the life of the loan (for most borrowers), switching to a conventional loan once you have 20% equity permanently eliminates mortgage insurance costs.
When Refinancing Makes Financial Sense
Calculate your break-even point: divide the refinancing costs by your monthly savings. If you plan to stay in the home beyond the break-even point, refinancing is likely worth it. For PMI removal, also factor in the annual PMI savings.
Costs to Consider
- Closing costs: typically 2%–5% of the loan amount
- Appraisal fee: $300–$600
- Application and origination fees
- Title insurance and escrow fees
Rate-and-Term Refinance vs Cash-Out Refinance
A rate-and-term refinance simply changes your rate or term and can eliminate PMI if you have enough equity. A cash-out refinance gives you access to equity but may result in a higher LTV that still requires PMI.
Conclusion
Refinancing with PMI elimination as the goal can save thousands per year. Run a thorough cost-benefit analysis before proceeding.
