Dear Dr. Don,
My home was purchased for $328,000 with a 30-year, fixed-rate loan at 5.88 percent more than five years ago. The lender did not require private mortgage insurance. The mortgage balance is now $292,000.
I am trying to refinance with the same mortgage company, but because the appraised value is now only $331,000, the lender is requiring PMI. The interest rate on the new loan is 4.88 percent, but the PMI payment is $175 a month. With this, my realized savings went down from $350 (without PMI) to $175.
Because they are servicing my current loan, and I am opting to have it refinanced through them, does it make sense for the lender to require PMI?
-- Curious Karloz
I understand your point of view, but it's normal and customary for a lender to require PMI on a first mortgage when the loan-to-value is more than 80 percent of the home's appraised value. For your home, the 80-percent LTV mark is $264,800 or $27,200 less than your current loan balance.
By refinancing, you're giving the lender the opportunity to manage its risk position in the property. You're taking advantage of the lower interest rate available by refinancing. The lender is taking advantage of the refinancing by requiring mortgage insurance.
You could choose an alternate mortgage structure to avoid PMI. An 80/10/10 mortgage, or piggyback mortgage, would have you take out a second mortgage for 10 percent of the home's value at the same time that you close on the new first mortgage.
However, because of the decline in housing values, this mortgage structure is much harder to come by. Even if you are able to find one, you may not like the interest rate on the second mortgage. The Mortgage Professor's calculator "Refinancing One FRM Into Two FRMs" can help you decide if this is the right program for you.
Another possibility would be to refinance with a self-insured mortgage. With this type of mortgage, the loan rate is slightly higher, to cover the lender's risk, but you explicitly pay PMI.
It's important to remember that PMI doesn't last forever. If you plan on being in your home for many years, the PMI is a short-term annoyance. Meanwhile, you'll enjoy this low interest rate for many years.