Even though I was not happy about it, I decided it's better to pay private mortgage insurance (PMI) rather than lose out on the rare chance to refinance my mortgage at 2.75 percent. It seems extremely unfair to me that I should have to pay PMI since we put 20 percent down on my home when we purchased it in 2005 during the housing bubble. Lenders require the PMI as protection in case a person defaults on a loan. In our case, it's highly unlikely we would let our home fall into foreclosure considering we paid it down from the original cost of $183,000 to our current balance of about $102,000. In the end, I learned that paying PMI will not be the end of the world for us.
Even though we never had to pay PMI before, we may have to pay it when we refinance since the value of our home has plummeted from $183,000 to about $123,000.
Paying a small amount
Because we are so close to having the 20 percent equity in the home that is required in order to forgo PMI, our lender would not require that we pay much PMI. The customer service representative from my mortgage company said we would only have to pay $30 a month for our PMI payment. The payment is included in our monthly mortgage. Even with PMI, we would owe about $270 less every month with our new mortgage terms.
Waiting for it to go away
According to the customer service representative, the PMI payment would automatically fall off of our mortgage when our home reaches the 78 percent mark, which means we would have 22 percent equity in our home. If we wanted the PMI removed at the 80 percent mark, we might have to pay for an appraiser to prove the value of our home. The good news is we would probably hit the 78 percent mark in less than one year. We probably won't end up spending more than about $300 on PMI.
Having the option to pay now
If we don't want to pay PMI, all we have to do is pay down our mortgage before we complete our refinance. We can also write a check at closing. The representative told me he believes we will settle within 45 days, but we lock in at 2.75 for 90 days. We could have our closing costs rolled into the new loan, but that would make it even more difficult to avoid PMI. My plan is to pay extra toward my mortgage each week until we settle.
Even though I like the idea of not having to pay PMI, I also have another motivation for paying down my mortgage as much as I can before we close on our refinance. I know it's my last chance to lower my balance so I can lower our monthly mortgage payments. Our new mortgage payment will most likely be the payment we have until we pay off the 15-year loan. It would be nice to have a smaller payment in case we have some months that are tight.
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