Should I Refinance to Get Rid of PMI?

In the first quarter of 2023, refinancing activity plummeted to the lowest point since 2020. You can blame rising interest rates. If you locked in a cheap mortgage in the past couple of years, you're not going to want a new loan at a higher rate, right?

But people don't just refinance to lock in a lower interest rate. One of the key benefits of refinancing is that you can often get rid of private mortgage insurance, or PMI, which is usually required if you put less than 20% down when buying your home. PMI typically costs between 0.2% to 2% of your total loan value each year.

Can you refinance to get rid of this expense? Is refinancing to get rid of PMI worth a potentially higher interest rate? Here's what homeowners with PMI need to know.

Can I refinance to get rid of PMI?

Yes, you can refinance your loan to get rid of PMI. In order to do this, your new mortgage balance must be 80% or less of your home's appraised value.

If you take out a conventional mortgage and put less than 20% down, your mortgage lender will normally add PMI to your monthly payment.

In a nutshell, there are two cases where it might be possible to refinance to get rid of PMI.

1. If your original mortgage balance was greater than 80% of the home's purchase price, and you've since paid down quite a bit.
2. If your home's value has increased significantly since you purchased it, and refinancing would result in a loan-to-value (LTV) ratio less than 80%.

For example: Let's say your home was worth $300,000 when you bought it. You took out a mortgage for 95% of the value, or $285,000 (and had to pay PMI). But now your house's value has gone up -- it's worth $375,000. You still owe the same amount. But what you owe is now 76% of the home value, so you don't need to pay PMI.

It's important to mention that refinancing is not the only way to get rid of PMI. Here are some others:

• With a conventional loan, your lender is required to cancel your PMI at the halfway point of your amortization schedule, or when your mortgage balance has reached 78% of the home's purchase price -- whichever comes first.
• You can request PMI cancellation when your mortgage balance reaches 80% of the home's purchase price.
• If you've owned your home for five years or more, you may be able to reappraise the home (which usually costs between $300 and $500) to demonstrate that your loan balance is less than 80% of your home's current value.

All three of these apply to conventional mortgages only. If you have an FHA mortgage loan, different rules apply. It can be very difficult to get rid of FHA mortgage insurance without refinancing.

Is getting rid of PMI enough reason to refinance?

Possibly. But if you have a low interest rate, you need to weigh the cost of higher rates against the savings of eliminating private mortgage insurance to determine if it's worth refinancing your home loan to get rid of PMI.

Also, remember that refinancing isn't free. You'll likely have to pay:

• Origination fees
• Appraisal fees
• Other closing costs

Costs can vary dramatically among mortgage refinance lenders, but expect to pay a few thousand dollars to refinance. The question to ask yourself is, "Will the savings from refinancing outweigh the costs?"

Let's say you're paying $200 per month for PMI. You refinance with the exact same interest rate -- but without PMI -- for $6,000 in closing costs. You'll save $200 per month this way. In 30 months, you'll have saved $6,000, the same amount you paid to refinance. It's only after that you'll start seeing the benefits of getting rid of PMI. So, as long as you're planning to stay in your home for longer than that, it could make sense.

Of course, a real-world situation will likely be a bit more complex. The refinancing rates you're offered may be higher than your current interest rate. And if you replace a mortgage you've been paying down for years with a fresh 30-year loan, you should consider the difference in payoff length.

Is refinancing to end PMI a smart choice for homeowners?

Generally, yes, but only if your overall savings outweighs the costs. Like most major financial decisions, refinancing to get rid of PMI depends on your situation.

If you're able to get rid of PMI by refinancing (and it will save you enough money to justify the cost), refinancing can certainly be a smart choice.

Be sure to consider interest rates, how long you plan to stay in the home, the fees and other costs of refinancing, and other relevant factors before making your decision.

Still have questions?

Here are some other questions we've answered:

• What Are Refinancing Fees? Mortgage Refinancing Costs to Plan For
• Why Are Mortgage Refinance Rates Higher Than Home Purchase Rates?
• Should You Refinance to Pay Off Debt?