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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