How to Avoid PMI With Refinance

by Karen Farnen ; Updated July 27, 2017

You can avoid private mortgage insurance when you refinance if you borrow 80 percent or less of your home's value. Lenders typically require it if you don't put at least 20 percent down on a conventional mortgage. The Federal Housing Administration requires similar government insurance on FHA loans with a low down payments. In either case, you can get rid of mortgage insurance by refinancing.

Ways to Eliminate PMI

Your bank is required to cancel the PMI on a conventional mortgage when the mortgage balance reaches 78 percent of your home's value at purchase. You can request cancellation on your own when your balance reaches 80 percent of value, but the bank doesn't have to agree. Refinancing or paying off the loan are the most foolproof ways to cancel PMI on conventional loans. The same is true for FHA loans, some of which require insurance for the length of the loan, according to the U.S. Department of Housing and Urban Development.

Refinancing Requirements

Equity Benchmark

You don't need mortgage insurance when you refinance if you have at least 20 percent equity. This is the same as a mortgage loan-to-value ratio of 80 percent or less.

You'll need an appraisal to refinance. If you don't have the required equity based on your purchase price, the appraisal may be high enough to qualify you anyway. Otherwise you can put in more cash to make up the difference.

Credit Requirements

You need the same qualifications for refinancing as you do to apply for an original mortgage, according to the Federal Reserve. Lenders consider your payment history, income, the amount of the loan, other debts and credit score.

You'll have the best chance of qualifying and get the most favorable interest rate with a FICO score of at least 740.

Tips

  • If your total monthly debt payments, including the mortgage and other debts, don't exceed 36 percent of your before-tax income, you'll have the best odds for approval, according to Bankrate.

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Fee and Interest Considerations

Possible Charges and Penalties

You'll have to pay fees and closing costs to refinance, but they vary with the lender. Some lenders also charge a prepayment penalty if you refinance or pay off your home loan early.

Tips

  • If your conventional loan balance is approaching 78 percent of your home's purchase price, you may be better off waiting for automatic removal of PMI rather than paying refinancing costs.

Balancing Costs and Interest

Depending on market rates, you may be able to reduce your interest rate by 2 percent or more during refinancing, but stopping PMI can make refinancing worth the cost even with a minimal drop in interest.

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