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Refinancing into a loan with PMI

As more and more borrowers realize that mortgage rates in Massachusetts and all of New England are at historic lows, they are inquiring about the possibility of refinancing into a lower interest rate.   Once they find out they have the credit scores and income to qualify the next obstacle is home values.   To get the lowest interest rate and avoid paying Private Mortgage Insurance (PMI) you need the loan amount to be 80% of the home appraised value.   Given the current state of the housing market, many borrowers are discovering that they no longer have the required 20% equity, even if they did just a few months ago.  

This is when PMI comes into play.   A lot of people immediately think of PMI as a bad thing.  It adds to the monthly mortgage payment without helping to pay down the balance of the mortgage.  A lot of people don't realize that going from a loan with no PMI to a loan with PMI might still be a good move.

One reason having PMI on your new loan could be a good option is that in some cases it may be used as a tax deduction.   You will have to consult a tax advisor to see if this deduction can be applied to your taxes.   If it can, it will help reduce the actual cost of the PMI.  

Another reason PMI is not as bad as it may initially seem is because it is not a permanent expense.  On conforming loans the PMI may be eliminated once you have 20% equity in the home.   Once it is removed you will be left with the original interest rate and no PMI payment.

Interest rates are at historic lows right now making it possible for many people to reduce their current mortgage payment, even if their new loan has PMI.   For example, say you bought a home 3 years ago for $400,000 with a 20% down payment.  You took out a loan for $320,000 and got a fixed at 6.375% with monthly principal and interest payments of $1,996.38.   Now that rates have come down, you have the option to refinance into a 30 year fixed loan amount of $315,000 at 5.00% with monthly principal and interest of $1,690.99 per month.  The only problem is that your home now appraises for $360,000 due to the weak housing market, leaving you with a little more than 10% equity in the home.   PMI is now required on the loan in order to get the lowest rates.  In this scenario you could expect to have to pay a PMI payment of about $130 per month.  

Even with the new PMI on the loan, your total payment would still be $175.39 less than you were currently paying.  And once you have 20% equity in the home again, the PMI would fall off and you would then be saving $305 per month compared to the loan you had with an interest rate of 6.375%.  Once you factor in potential tax savings from the PMI it becomes clear that it is worth it to refinance even if you no longer have the 20% equity in your home.  

To see if it makes sense for you to refinance given the historically low 30 year fixed rates that are currently available, give us a call at 508-839-1117 to talk with one of our loan officers.

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