July 19, 2012

Should I pay off a little extra principal to eliminate the need for private mortgage insurance?

If you are going to make application to refinance, you do not want to pre-pay the lump sum of seventy eight hundred dollars on the principal of the current loan before the closing. If you were to pay it now and the refinance application is subsequently denied, you would still be paying interest on a higher rate loan…

Reader Question: We are about to refinance and are seventy eight hundred dollars away from eighty percent of our home’s assessed value. The PMI balloon payment thing is about sixty five hundred dollars. Should not we (because we can afford it) pay the seventy eight hundred dollars then not pay the PMI?  But the real question is should I do it before closing or at closing? Thanks. Nick G. – Philadelphia, PA

Monty’s Answer: Hello Nick, I have no specifics on your circumstances nor the specifics of your mortgage instrument so this answer is somewhat qualified. If you are going to make application to refinance, you do not want to pre-pay the lump sum of seventy eight hundred dollars on the principal of the current loan before the closing. If you were to pay it now and the refinance application is subsequently denied, you would still be paying interest on a higher rate loan. The lender will not refund principal payments once they are applied to the mortgage. The same scenario would hold true if you paid down the principal and then asked for release from the PMI insurance. You could pay the loan down, but unless the new appraisal later determined that you had sufficient equity, you would owe less money, but still be paying the original interest rate and the PMI insurance. That said, I suggest the real question you should be asking is: “What will my property appraise for today?”.

On your private mortgage insurance (PMI) question I am unclear about the source of your sixty five hundred dollar estimate. It sounds like that number refers to the amount of cash you would have to pay to eliminate PMI based on the assessed value you referenced. Not knowing the details of your PMI agreement, I would suspect that number is a moving target because most PMI companies utilize the current appraised value as the benchmark for determining value. So, if you requested your property be re-appraised today and the new value was high enough, there is a possibility that your contract allows you to simply cancel the PMI insurance with no cash out-of-pocket payment.

If you went the full refinance route PMI may not be required. Work with your original loan officer to work the calculations with you. You need to know what value is shown in the original appraisal on the file. However, depending on when you last financed or purchased the property, an updated appraisal may be lower than the appraisal the lender currently has on file. If that were the case it may be difficult to refinance or eliminate PMI and you would be at risk for the new appraisal fee.

The key is determining what value a new appraisal would have to attain to qualify for both a refinance and elimination of PMI, and, if obtaining that appraisal value is feasible. You need some recent comparable sales to learn what homes similar to yours have sold for recently to make that judgment.

Lastly, if it becomes clear that a refinance is probable, I would reach beyond the current lender and interview multiple lenders in seeking the best alternatives. If you have more questions ask me. Let me know how this turns out for you. Good luck.

Monty.