The average 30 year fixed-rate mortgage went up 0.02% last week up to 3.05%. While this was a slight increase, interest rates are still incredibly low considering they have not been below 3% since February, according to Bankrate’s weekly rate survey.
Despite low interest rates, you might end up having higher monthly mortgage payments if you’re in the market to buy a home. That’s because there’s a shortage of homes in many areas across the U.S., which has set home prices on an upward trend. Without a larger down payment to offset these price increases, those looking to buy a home may end up taking on a larger loan amount with a higher monthly payment.
You can look at similar homes that have recently sold in your neighborhood to get an idea of your home’s value and whether or not you have enough equity to remove PMI.
But the rise in housing prices can actually be helpful for existing homeowners — especially those currently paying private mortgage insurance, or PMI. With a big enough increase in home values, existing homeowners can use the additional equity to refinance and not only get rid of PMI, but also take advantage of a lower interest rate.
ABOUT THE LATEST MORTGAGE RATES
Last week’s average mortgage rate is based on mortgage rate information provided by national lenders to Bankrate.com, which like NextAdvisor is owned by Red Ventures.
Four Ways to Get Rid of PMI
PMI is an added cost that lenders typically require when the loan-to-value ratio is greater than 80 percent. In other words, PMI could be required on purchases where the down payment is less than 20 percent, or refinances where the loan amount divided by the value of the home is greater than 80 percent. Since homes with less equity are generally viewed as more risky for the lender, PMI is added to the loan to protect the lender in the event of a default. Although PMI is paid by borrowers, it only benefits the lender. PMI can be structured as a one-time upfront cost when the loan is obtained, an additional monthly amount added to your regular mortgage payment, or a combination of the two.
If a lender requires PMI for your loan, know that there are ways it can be removed:
- Wait for it to roll off: Lenders are required to remove PMI once your loan has been paid down to 78 percent of the original value of the home. PMI can also be removed once you have paid on the loan for more than half of its original term. So for a 30 year loan, PMI could be removed after 15 years of payments.
- Request cancellation: If you want to be more proactive in removing PMI, you can request the lender to do so once you have paid down your mortgage balance to 80 percent of its original value. This figure is usually the lower of the original sales price or appraised value at the time of purchase.
- Refinance into a new no-PMI loan: Another common method of removing PMI is to refinance into a brand new loan. This can be particularly useful if your home has appreciated in value. Many lenders require an appraisal to determine what your house is worth, and will determine the need for PMI based on the value of your current home. If your new loan amount divided by your home’s current value is 80 percent or less, PMI will not be required on the new loan.
Refinancing to Get Rid of PMI
With rates as low as they have been, the savings you could see from refinancing can really add up. Assuming a typical PMI cost of 0.5% of the loan amount, the NextAdvisor mortgage calculator shows just how beneficial it can be for you to not only refinance to a lower rate, but also remove the monthly cost of PMI.
Example: 30 year fixed, $250,000 loan with and without PMI
|Interest Rate||Monthly P&I Payment||Estimated Monthly Cost of PMI (0.5%)||Total Monthly Payment||Savings per Month After Removal of PMI|
|Loan A with PMI||4.125%||$1,211||$104||$1,315||—|
|Loan B with no PMI||3.125%||$1,070||$0||$1,070||$245|
It’s important to note that we’ve considered a relatively low cost of PMI at just 0.5% of the loan amount. Depending on your specific circumstances, it’s possible that PMI could be costing you more each month, in which case refinancing to remove PMI would save you even more money.
Don’t Forget the Closing Costs
Refinances don’t come free of charge, so if you’re thinking about refinancing your house to remove the cost of PMI, you’ll want to calculate your break even point to make sure it makes sense for your situation. To do this, add up the closing costs associated with refinancing and then divide it by the monthly savings on the new loan. This will give you the break-even point in months, or how long it will take to recoup the costs of refinancing. Looking at this number can tell you how long you need to retain ownership of the home for refinancing to be worthwhile in the long run.