How to Refinance and Avoid PMI

Although mortgage refinances aren't necessary when mortgage rates decrease, many property owners make a mad dash to their lender to obtain a new home loan. 

Dropping rates spawn refinances because this gives owners the chance to lower their existing rates and lower their mortgage payments. A lower payment can be a blessing if you're on the brink of missing a payment. But like the original mortgage loan, some lenders charge private mortgage insurance or PMI.

Private mortgage insurance is a type of insurance policy that safeguards home loan lenders if you default on the mortgage loan. Lenders can recover their financial loss via private mortgage insurance, but you're responsible for the monthly premium. Annual PMI premiums are typically 1 percent of the mortgage balance. The good news is that PMI premiums are dropped once the property acquires at least 20 percent equity, and this drop often triggers a reduction in home loan payment.

But what happens to PMI payments if you refinance?

Refinancing a mortgage loan can get rid of private mortgage insurance. A refinance is when you apply for a new mortgage to cancel your existing mortgage. You must find a lender, complete a new loan application, submit your most recent financial information and wait for an approval. Getting rid of PMI with a refinance isn't guaranteed, but a few tricks might convince your lender to waive this fee.

20 Percent Equity

PMI is standard if you have less than 20 percent equity in your house. FHA-approved mortgage lenders will refinance your property with only 3.5 percent equity, but they will charge mortgage insurance. The best way to get around PMI with a refinance is to wait until your property gains values. The mortgage lender will send an appraiser to access your equity, but you can hire your own appraiser beforehand to evaluate your property's worth.

80/10/10 Option

If you don't have 20 percent equity, and you don't want to pay PMI, plan to refinance with a down payment to save on monthly premiums. This option isn't available to every property owner. However, if there's at least 10 percent equity in your property, you can provide a 10 percent down payment to compensate for the difference. The mortgage lender then lends 80 percent of the property's value and waives private mortgage insurance.

Higher Interest Rate

Not every lender will agree to this arrangement, but if you want to bypass PMI and you don't have cash for a down payment, negotiate with your lender and ask them to charge a higher mortgage rate. For this option to work, the interest rate must be lower than what you're currently paying. For example, if you qualify for a 4 percent rate, and you're currently paying 7 percent, the lender might settle on 5.50 percent and waive PMI.