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With mortgage rates low, consider canceling PMI

Marcie Geffner

As mortgage rates stall near record lows, it's a fine time to refinance to grab a lower interest rate. But there are other reasons to refinance. One of them is to cancel mortgage insurance.

Mortgage insurance is a policy that reimburses the lender if you default on your home loan. Most lenders require mortgage insurance when you make a down payment of less than 20%. You, the borrower, pay the premiums. It's often known as private mortgage insurance, or PMI. The Federal Housing Administration sells mortgage insurance, too, in what's called an FHA loan.

Sometime after you buy the house, the combination of mortgage payments and value appreciation will mean that you owe 80% or less of the home's value, which is another way of saying that your equity is 20% or more. You can ask your private mortgage insurer at that point to cancel PMI. To do so, you'll have to pay for an appraisal and fill out paperwork and hope the decision goes your way.

Read more about how to get rid of PMI.

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How this might work

Let's say you bought a house 3 years ago for $100,000. You made a 10% down payment and borrowed $90,000 with a 30-year, fixed-rate mortgage with an interest rate of 4.5%. (The average 30-year fixed rate on Aug. 14, 2013, was 4.57%).

Your monthly principal, interest and mortgage insurance payment totals $487.

Three years later, you've made all your payments faithfully, and now you owe $85,000. Meanwhile, the house has gained in value and now it's worth $108,000. You owe 79% of the home's value (the $85,000 you owe divided by the $108,000 appraised value).

Use the amortization schedule calculator to figure out how much you owe on your mortgage.

You could petition the bank to drop the mortgage insurance (or wait a few months for mortgage insurance to be dropped automatically, once the loan-to-value ratio drops to 78%).

But you would save even more by refinancing at today's lower interest rates: You drop the PMI, and you get a lower interest rate. It's a combo that can make your monthly payment a lot lower.

In this example, your monthly principal, interest and monthly mortgage insurance payment would go from $487 to $382, if you refinance with a 30-year loan at 3.5%. An even smarter move would be to pay the loan off in 25 years (tell your lender you want to amortize it for 25 years) so you're not starting all over with another 30-year loan commitment. Paying it off in 25 years would make the monthly principal and interest $426, which still saves $60 a month over the higher-rate loan with PMI.

That 3.5% rate is possible for borrowers with good credit.

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Mortgage rates this week

The benchmark 30-year fixed-rate mortgage remained unchanged this week, at 3.56%, according to Bankrate's weekly survey of large lenders. A year ago, it was 4.06%. Four weeks ago, the rate was 3.6%.

The mortgages in this week's survey had an average total of 0.25 discount and origination points.

Over the past 52 weeks, the 30-year fixed has averaged 3.87%. This week's rate is 0.31 percentage points lower than the 52-week average.

  • The benchmark 15-year fixed-rate mortgage was unchanged at 2.84%.
  • The benchmark 5/1 adjustable-rate mortgage rose to 3.05% from 3.04%.
  • The benchmark 30-year fixed-rate jumbo mortgage rose to 3.61% from 3.58%.

Weekly national mortgage survey

Results of Bankrate.com's Aug. 17, 2016, weekly national survey of large lenders and the effect on monthly payments for a $165,000 loan:

30-year fixed 15-year fixed 5-year ARM
This week's rate: 3.56% 2.84% 3.05%
Change from last week: N/C N/C +0.01
Monthly payment: $746.46 $1,126.81 $700.10
Change from last week: N/C N/C +$0.89
Mortgage analysis

Papers, please

There's one big, red-letter exception to the rule I mentioned -- the rule that says you can cancel PMI when you owe 80% or less of the home's value. That exception involves FHA loans. If you got an FHA-insured mortgage in the last few years, the premiums cannot be canceled. The inability to cancel FHA monthly premiums gives borrowers a powerful incentive to refinance into conventional loans as soon as they can.

"We have a lot of people trying to get rid of PMI," says Michael Moskowitz, president of Equity Now, a lender in New York City. For people who got their mortgages 8 years ago at 6%, and who haven't refinanced since, "they can't allow themselves not to refinance," Moskowitz says.

He has another bit of advice: "Please get the paperwork in," he pleads. "An experienced company should provide you with a list (of necessary documentation) and you should be able to respond speedily."

Even if you have an FHA loan and you still owe well more than 80% of the home's current value, you can get an FHA Streamline refinance, Moskowitz says.

You'll still have to pay monthly FHA premiums until you refinance again, but you can decrease the monthly payment by getting a lower interest rate, and the paperwork is minimal.

"We close those like in 2 weeks," Moskowitz says.

A lot of his FHA Streamline refi customers have big loans and they save $250 to $350 a month by getting a lower mortgage rate.

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Fewer refi applications

Bankrate has been tracking mortgage rates since September 1985, and in that time, the record low for the 30-year fixed was 3.5%, in December 2012.

With mortgage rates stalled just above that record low, there was a 4% decrease last week in the number of mortgage refinance applications, according to the Mortgage Bankers Association. 13.2% of applications were from Veterans Administration borrowers, and 9.6% were from FHA borrowers.

The VA allows qualified borrowers to buy with zero down, and the FHA allows down payments a slow as 3.5%.



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