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Underwater with PMI: Help Toward Refinancing

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I recently came across a question from a homeowner in Washington state who was concerned about his options to refinance. He writes:

“We purchased a home in 2007 for $307,000 with a 7% interest only Fannie Mae loan with private mortgage insurance. The home is in good condition but its market value is currently estimated at $280,000…We want to get a lower interest rate and an amortized loan to start paying off the principal, but the banks won’t even look at it because of our PMI. We don’t want to default and ruin our credit but we don’t see how else we can get to a conventional loan and reduce our interest rate. What advice can you give us?”

I suspect many Americans are struggling with a similar burden. If you bought a home with less than 20% down, there’s a strong chance you’re paying for private mortgage insurance or PMI. After all, many lenders do require borrowers to obtain this insurance if they take out a mortgage that is greater than 80% of the property’s appraised value or sales price. The problem is that in order to refinance with PMI, you typically need to have at least 5% equity, according to my mortgage broker Mike Raimi of WCS Lending in Florida. But with housing prices continuing to fall, there’s a chance that these very homeowners who entered a mortgage with private mortgage insurance are now underwater, meaning their mortgage is greater than the appraised value of their property altogether.

So what’s a borrower to do in this sticky circumstance? Here are three tips. The first offers some possible immediate help, the last two require patience and persistence:

1. Apply for HARP

If you have a Fannie Mae or Freddie Mac loan, are in good payment standing and are no more than 25% underwater, you may very well qualify for the The Home Affordable Refinance Program or HARP. For example, if you owe $300,000, and your home appraises for only $225,000, you may be eligible. Note that if you are underwater and have PMI you may only work with your existing lender. Hopefully you have a lender that is cooperating with these federal housing plans. Call and ask to speak specifically with a loan officer who can work with you on HARP and tell them that you meet the basic qualifications of the program, advises Joseph Kelly, President of Arcloan.com, a pro-consumer mortgage strategies firm.  This may be frustrating at first because lenders’ phone lines are clogged up, but be persistent – it should pay off, says Kelly.  For more information on HARP visit MakingHomeAffordable.gov.

2. Reach 95% LTV

If the first tip doesn’t work, you need to work on building equity in order to then apply for a refi from any bank.  If you can, start making some extra payments directly towards the loan’s principal. Once your mortgage reaches 95% of your home’s value, meaning you have at least 5% equity, you can typically refinance and shop around for a new mortgage.  Ninety-five percent LTV is usually the maximum ratio a borrower can have before getting banks to work with them towards a refinance, says Raimi. “Depending on the insurance company there may also be credit score requirements [to refinance with PMI],” he says.

3. Reach 80% LTV

If you can be even extra aggressive and make further payments towards your loan’s principal – getting to 20% equity is the sweet spot. At this point you can typically drop your private mortgage insurance coverage, altogether, which not only saves you thousands of dollars annually, it makes the refinancing process a lot simpler.

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  • Sondra

    I paid my mortgage down to 78% of the purchase price in 5 years, which I think is pretty good. I also paid each month in time for 5 years. Bank of America still refuses to cancel my PMI. They claim that they would cancel it if I have an appraisal done. It is in FL and it is an underwater mortgage (like we all have). Sleezy Bank of America does charge me 200 PMI a month although I paid it down 78% of the PUCHASE PRICE of 254000. What can I do.
    Sondra

  • Stephen

    In 2006, my house (New Jersey) was purchased @ $350,000-2 1/2 years later, the house was down to $290,000-Now, I’d be lucky to appraise at $265,000. Even if I had put 20% down, I’d still be underwater. I’ve lost 24.29% of my home value in 4 years and 2 months. It’s not that I can’t pay my mortgage, I do-on time-every month. My issue, which I think is the same issue for many, is that 1) PMI prevents us (those who did not put 20% down) from refinance, 2) lenders do not want to do loan modifications unless you default (which hurts badly in other areas) and 3) we, the homeowner, are still chasing our tails; every time we get the mortgage worked down, the home value drops. I wish these options listed in this article existed-but for the majority of us, it doesn’t.

    • Gerri Detweiler

      I do really feel for you. It’s a mess and I would like to see more options for homeowners who do want to stay in their homes. Foreclosures hurt families, neighborhoods and the economy.

  • Farnoosh

    Hi Sondra,
    Great work paying down your mortgage! Unfortunately you need to pay down your mortgage until it reaches 95% of your home’s current market value in order to begin refi discussions with your existing lender. Maybe an appraisal would show that you, in fact, have equity at this point. Or, at the least, do an appraisal to find out how much more you need to pay down to reach 5% equity – it may not be much more.

    Good luck and best wishes!

  • http://www.hsh.com Gina Pogol

    You may have better luck refinancing through FHA at 96.5% of your home’s value and bypass private mortgage insurers altogether. Another advantage is that private insurers require credit scores ranging from 680 to 740 (depending on the property type and location) to insure your refinance while FHA will back a loan with a score as low as 580 (although lenders may impose overlays of 600- 640). If your credit or income has taken a beating along with your home’s value, FHA is a viable refinancing alternative.

  • http://similarboat bp

    I also have a loan with fannie may but do not have PMI. Instead my lender GMAC, split the loan into a first and a second to avoid PMI. I have a 7% interest only loan and owe $199,000 between the two. Two years ago my home appraised at $235,000 and last yearit appraised at $175,000. As you can see I am underwater with the loan. GMAC will not do anything because I am not behind on my loans. I live in WV where they cannot loan more then value of home… I have had to file BR last year because I went blind and my income was cut drastically. I want to get out of my home and move to the country wwhere my 15 yer old can hunt, etc but seem to be stuck,. Anyone have any ideas??

  • Barbara

    My LTV is at 91.9% I take it thats good I hope. But my lender won’t refin. me or drop the PMI, the house is underwater. All these low rates and I can’t take advantage of them. I got approve for a FHA loan but it needed to appraise more then the house is worth. Is there anything us homeowner can do.

  • Stephen

    Barbara,
    I am in a similar boat-Unfortunately, there is very little. The gov’t programs originally were more focused on loans w/out PMI, and so I ran into the same issue. Apparently, there is a gov’t program that was introduced two or three months ago that allowed lenders to receive a credit from the gov’t for refinancing homes underwater. The problem is, the home values are so underwater and the incentives are so terrible from the gov’t, the lenders do not want to offer it or even try to offer it. I believe the program allowed the lender to write off part of the balance of the mortgage, so that refinancing was possible. I have been told that my only option is to continue to pay the principal down and HOPE that A) house values start to come back up and B) Interest rates do not go up with that. From what I’ve seen, home values are still dropping and interest rates are going up-So, it doesn’t look like we are going to get much relief from this route.

  • liz

    I am also in a situation with two of my houses. I have two house with PMI’s in two different states. My mortgage/bank offered to refinance me with lower interest rates, however, they are not willing to eliminate the PMI’s. My primary home is a 2 fmly. the interest rate is presently at 6.25%., owing $266k, my banks computer appraisal came in at $262k the town assessed value is $252k, purchase price in 2006 was $305k. My second home is a single fmly., fortunately it is not underwater. I woe $77k and the Value is $85k. purchase price $105k. My bank offered me 4.75% on the 2fmly. and 4.37% on the single fmly. What should I do.

  • Carolyn Green

    Hi we live in Florida. Our home is worth 150.00 and our mortgage is 300,000. We filed a lawsuit against Bank of America last July. The Peerless suit. We has a mortgage company called Taylor Bean and Whitaker. They got shut down by the government . Since then our mortgage has been taken over by 3 different company’s . Cannot get any help. If we don’t win the suit will Ford and Huff vs BoA we are going to short sale and start over.

  • http://none Jo-Ann

    boa never eliminates th PMI. I had an appraisal dne and my LTV was well in keeping within the requiremn=ents an they still refused to remove the PMI

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