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How to Avoid PMI With Refinance

how to avoid pmi when refinancing

Keeping your home neat and tidy can improve your appraised value.

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Lenders typically make you pay for private mortgage insurance when you put less than 20 percent down. That private mortgage insurance pays the lender if you don't make your mortgage payments. While PMI can be automatically cancelled when your loan reaches a set threshold -- usually when it's due to drop down to 78 percent of the property's original value -- you may be able to have it cancelled sooner if your loan amount drops below 80 percent of your property's value. If your existing lender refuses to cancel your PMI, though, refinancing to a new loan without it will do the trick.

Step 1

Compare the cost of a refinance to the cost of paying PMI. If your refinance's closing costs are equal to 2 percent of your loan's balance, but you only have to pay three more years of PMI at a 0.75 percent rate, it may not be worth the trouble to refinance for the minimal savings.

Step 2

Estimate the value of your home before starting the refinancing process. You can do this by looking at recent sales in the area, using the automated valuation models on websites, asking a real estate agent for an assessment or paying an appraiser to value your home for you. If your loan balance is less than 80 percent of your home's value, you should be able to find a mortgage that won't carry PMI.

Step 3

Pull your credit report. Loans that can be taken out without mortgage insurance are frequently conventional loans that vary your rate based on your credit score. While credit score tiers vary

between lenders, one good rule of thumb is to assume that you will get a very good rate with a score of 720 or above and, depending on the lender, perhaps an even better rate with higher scores. If you find errors on your credit report, use your credit bureau's dispute process to have them removed before applying for the refinance. You may also choose to work with your lender, who may be able to expedite the process with a rapid rescore that can update your score in days instead of weeks.

Step 4

Apply for a refinance loan with a lender or broker. While each lender's process differs, it will be similar to the process involved in applying for your original mortgage. You can usually expect to have to submit supporting documentation for your income and assets which may include pay stubs, W-2s, bank statements and tax returns.

Prepare your house for the appraisal. To get a loan without PMI, your home's value will need to be at least 25 percent higher than your loan balance (which is equivalent to borrowing no more than 80 percent of your home's value), so it's important to have your appraisal come in at or above that threshold. At a minimum, ensure that the home has good curb appeal from the outside and has the appearance of being well-maintained on the interior. While many appraisers like to be left alone to work, providing the appraiser with a list of all of the upgrades that you've made to your home can be a good way to ensure that he doesn't miss anything.

Close the loan once you receive your final approval for a refinance without any private mortgage insurance.

Category: Credit

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