Dear Dr. Don,
I was wondering if refinancing my house at the new lower rates would rid me of private mortgage insurance. I am at 86 percent loan-to-value right now on a $264,000 loan at 5.75 percent.
I have found a rate of 4.875 and it would lower my payment about $180 per month. Would it lower my LTV ratio and rid me of the PMI?
-- Cynthia Cancels
Dear Cynthia,
To avoid paying private mortgage insurance on a conventional mortgage, you need to have 20 percent equity, or 80 percent loan-to-value. Having a loan-to-value of 86 percent will reduce your PMI premium (versus having less equity) but you don't have enough equity for the lender skip PMI.
An alternate solution is to take out a piggyback mortgage. With a piggyback mortgage, you have a first mortgage with 80 percent loan to value and you take out a second mortgage for the remaining loan amount.
Traditionally this has been an 80/10/10 mortgage but there's no reason why it can't be an 80/6/14 loan with you putting 14 percent down.
Another possible solution is to use a self-insured mortgage. A self-insured mortgage has the mortgage insurance premium baked into the loan rate.
The downside to this type of loan is that the rate stays baked in for as long as you have the loan. In contrast, PMI is canceled when you reach 78 percent loan-to-value.
When you're shopping loans, ask your lender or mortgage broker to compare your alternatives and help you decide which loan is appropriate for your situation. Or, try using the Mortgage Professor's "Less-Than-20% Down Calculator"