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I am a relatively new home owner, having purchased my first home in October 2009. Overall, I feel I got an excellent deal on the loan, which was 5% no-cost, no points, and 12% down. I had to take on PMI (mortgage insurance) since I was unable to put down a full 20%. This mortgage insurance is costing me a hefty $1752 per year, and I am wondering if there are any options for refinancing that would allow me to remove the PMI, despite not yet reaching that 80% loan-to-value ratio.

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    Posting as a comment as I'm not 100% but I believe any FHA mortgage requires a minimum of 5 years of PMI payments if you put less than 20% down. – Jeff Swensen Jun 16 '11 at 17:46
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    @Jeff Swensen FHA does require 5 years of PMI payments. Whether you have 20% LTV or not. It is best to refinance out of FHA to get rid of PMI sooner than 5 years. – mpenrow Jun 16 '11 at 18:17
  • @mpenrow: How exactly does one refinance out of an FHA loan? – jrista Jun 16 '11 at 21:29
  • @jrista you would refinance into a conventional loan. Basically you are dropping the Federal Government's guarantee to pay the bank if you skip out on them. There are some other differences between conventional and FHA but that is the big one. – mpenrow Jun 16 '11 at 21:56
  • @mpenrow: I guess I will have to check, but I thought I got a conventional, 30-year loan when I purchased the house. Is it simply required by law that all first-time home buyers get an FHA loan? Its been a couple years, and I have not looked at my paperwork for some time, but I remember discussing "conventional loan" a fair bit with the lender, although FHA came up a few times as well. – jrista Jun 16 '11 at 22:03
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On a 5% mortgage, after 24 months of payments on a 30 yr amortization, you will have paid 3% of the principal, so all else being equal, you have 15% equity. If the value is up, even a bit, the first step is to call the bank. If you are pretty sure it's up enough, ask them to remove PMI in exchange for you paying the appraisal fee. If they hesitate, ask them if you prepay the remaining missing 5%, if they'll pull the fee. 8% of principal is paid by the end of year 5, at which time they have no choice but to remove it. Doing so any sooner is their call. If they agree to the pre-pay deal, I'd find a way to raise the funds. It will save you over $5000 in a short period.

Last, while 5% really is great, especially NPNC, shop around, you may find another no cost deal at the same or lower rate, no harm to look, and they may appraise you at 80% LTV.

  • So I guess I am not entirely certain how to equity and LTV are related. I understand equity is the difference between the market value and outstanding loans/liens/etc., so if I have a $315,000 home with approx. $270,000 remaining on the mortgage, my equity would be $45,000. But what % equity is that...45k/315k (14.3%), or 45k/270k (16.7%)? – jrista Jun 16 '11 at 21:26
  • 270/315= 85.7% loan to value. You need to be under 80% usually, so $252K or so. $1750/yr is a high price to pay for the lack of $18K. It's like an extra 9.7% on top of the mortgage rate. – JoeTaxpayer Jun 16 '11 at 21:57
  • @JoeTaxpayer: Aye, $1750 is starting to become very painful as I'm trying to pull back on my expenses. Its the single largest thing that I believe I can eliminate...but it sounds like I'll need some capital to do so. – jrista Jun 16 '11 at 22:06
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    Either increase the amount paid off the mortgage, or increase the value of the property. The second one might be easier to do via improvements/appraisals. – Andrew Lewis Jun 16 '11 at 22:11
  • Andrew, excellent idea. I'd say that the sweat equity might go a long way depending on what the house looked like prior. But as I suggested above, a discussion with the bank should occur first. They are not required to move PMI until the loan amortizes to the 80% level. – JoeTaxpayer Jun 16 '11 at 23:11
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Banks are currently a lot less open to 'creative financing' than they were a few years ago, but you may still be able to take advantage of the tactic of splitting the loan into two parts, a smaller 'second mortgage' sometimes called a 'purchase money second' at a slightly higher interest rate for around 15-20% of the value, and the remaining in a conventional mortgage. Since this tactic has been around for a long time, it's not quite in the category of the shenanegans they were pulling a few years back, so has a lot more potential to still be an option. I did this in for my first house in '93 and again in '99 when I moved to a larger home after getting married. It allowed me to get into both houses with less than 20% down and not pay PMI.

This way neither loan is above 80% so you don't have to pay PMI. The interest on the second loan will be higher, but usually only a few percent, and is thus usually a fraction of what you were paying for the PMI. (and it's deductible from your taxes)

If you've been making your payments on time and have a good credit rating, then you might be able to find someone who would offer you such a deal. You might even be able to get a rate for your primary that is down in the low 4's depending on where rates are today and what your credit rating is like. If you can get the main loan low enough, even if the other is like say 7%, your blended rate may still be right around 5%

If you can find a deal like this, it's also great material to use to negotiate with your current lender "either help me get the PMI off this loan or I'm going to refinance." Then you can compare what they will offer you with what you can get in a refinance and decide what makes the most sense for you.

On word of warning, when refinancing, do NOT get sucked into an adjustable rate mortgage. If you are finding life 'tight' right now with house payments and all, the an ARM could be highly seductive since they often offer a very low initial rate.. however then invariably adjust upwards, and you could suddenly find yourself with a monster payment far larger than what you have now. With low rates where they are, getting a conventional fixed rate loan (or loans in the case of the tactic being discussed here) is the way to go.

  • An ARM will never be seductive to me...I know exactly what they are, and have zero interest in them, regardless of my financial situation. I'll look into getting a second mortgage, and see if it is a better option than sticking with the PMI. Thanks for the insight. – jrista Jun 17 '11 at 23:41
  • Heh glad to hear you are wary of ARM's They have their place, especially back during times of double-digit interest rates on mortgages, if used VERY carefully. Unfortunately they are rarely sold that way. – Chuck van der Linden Jun 18 '11 at 3:51
  • Yeah, as a (niche) financial tool, I understand the value of an ARM. The problem I have with them IS the way they are sold, and how many people buy into them thinking they are a great deal, only to get shafted a few years later. Big part of the reason we have a lending crisis right now. – jrista Jun 18 '11 at 5:20
  • Heh yeah that, the belief that prices would always go up "this time it's different", and total failure at just about every single link in the chain. Mortgage brokers lying, banks not reviewing paperwork, applying policies designed for first time buyers to 3 times as many folks buying their 2nd, 3rd, 4th etc home, appraisers giving banks whatever values they wanted on appraisals, rating agencies doing likewise for CDO's, insurers issuing credit default swaps without even a fraction of the backing needed. sorry what? hey where did this soapbox I'm standing on come from? – Chuck van der Linden Jun 18 '11 at 5:44
  • Haha! Yeah, its a mess so big out there that we need numbers larger than our astronomical federal deficit to assign any useful magnitude to it all. ;) Well, here's to hoping we get some honorable, fiscally sound financial wizards in political offices during the next few rounds of elections, and clean this nasty mess up. – jrista Jun 18 '11 at 6:05

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