The 1 Mistake to Avoid in a Hot Housing Market
by Maurie Backman | Published on Sept. 10, 2021
This blunder could end up costing you a lot of money.
It's a hard time to be looking for a home. Property values have soared on a national level, and a lot of buyers are getting priced out of the market because of it.
But there's one mistake some homeowners may be at risk of making in today's market -- and it's one that could cost them big time.
Could you get rid of PMI?
If you put down less than 20% of your home's purchase price when you signed a conventional mortgage, then you may still be paying private mortgage insurance (PMI).
PMI is a special type of insurance designed to protect mortgage lenders in case borrowers stop making their loan payments. And while the cost of PMI can vary, it typically amounts to 0.5% to 1% of a loan's amount. This means that someone taking out a $300,000 mortgage could end up paying an extra $1,500 to $3,000 a year in PMI.
The good thing about PMI is that it's not supposed to last forever. Once your mortgage balance is whittled down to 78% of your home's original purchase price, your lender must cancel PMI automatically. And you can request to have PMI removed once your mortgage balance gets down to 80% of your home's original purchase price.
But because home values are up right now, you may have a faster option for getting rid of PMI -- refinancing.
When you refinance a mortgage, you trade in your existing home loan for a new one. And if you get a new loan whose balance is 80% or less of your home's value, then you should be off the hook as far as PMI goes.
So, let's say you owe $280,000 on your mortgage, but your current home value is $360,000. That means your loan balance is equal to about 78% of what your home is worth. A lender should, in this case, let you refinance into a new loan without having to be liable for PMI.
Now keep in mind that refinancing has its drawbacks -- namely, that you'll be charged closing costs to finalize your new loan, and those could be substantial. Closing costs typically amount to 2% to 5% of a loan balance. So if you take out a $280,000 mortgage, you could pay $5,600 at a minimum just to put that new loan into place.
That said, refinancing might also enable you to lower the interest rate you're paying on your mortgage. As such, you might not only manage to get rid of PMI, but also, lower your monthly housing payments in the process.
Don't miss this opportunity
Home values may be high right now on a national level, but we don't know how long they'll stay that way. If you're currently paying PMI on your mortgage, and your home's value has increased significantly since you bought it, then it pays to see if refinancing to a new loan will get you out of paying that fee.
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