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Refinance to get rid of private mortgage insurance

Posted by Jill Boynton November 24, 2008 09:30 AM

"Should I refinance if I can only get a 0.1 percent drop in my rate? I also have PMI insurance which will last another 4 to 5 years, but I can get rid of it if I refinance. I know it pushes my payments back out to 30 years but if I maintain the amount I currently pay I can pay off early."

It sounds like you are in a much better financial position today than when you took out your present mortgage. If you are paying PMI, or private mortgage insurance, you must have taken out a mortgage for more than 80 percent of the value of the property. Private Mortgage Insurance is required by lenders making loans that are deemed "riskier" because of the high mortgage-to-equity ratio. You now have more than 20 percent equity and are in a position to drop that extra monthly payment.

In addition you intend to refinance to obtain a lower monthly payment, yet still plan to make your current payment so that your mortgage will be paid off in less than 30 years. Bravo! However, there is some math to do to see if this all makes sense.

First you must consider the cost of refinancing. The bank will probably require an appraisal at your expense, and will charge you other closing costs that can add up to several thousand dollars. Normally refinancing to achieve a 0.1 percent drop in the interest rate won't make sense, because the monthly savings will be miniscule compared to the costs of the new loan. However getting rid of your monthly PMI payment may make this a much more attractive deal.

Divide the total cost of refinancing by the total monthly savings to get your "break even point", or the number of months it will take you to recoup the closing costs. Then ask yourself how long you intend to stay in your home. If it's at least as long as it takes to break even then it makes sense to refinance.

Finally if you make one extra principal payment per year you can reduce your 30 year mortgage to a 22 year mortgage. But don't neglect your retirement savings to do this. It is just as important to stay on track for retirement as it is to pay off your mortgage.

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Local finance professionals share insights and advice on issues such as budgeting, managing debt, and retirement planning.
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About the contributors

Jill Boynton is co-founder of Cornerstone Financial Planning in Newington, N.H. Along with traditional financial planning services, Boynton provides analysis specifically for divorce.
Andrew Chan is the founder of Integrative Financial Advisors in Framingham. He provides comprehensive financial planning advice and investment management services. He has been an adviser for over 12 years and works with clients to integrate all aspects of their finances including investments, retirement, education funding, and tax planning.
Cheryl Costa is a managing director at AFW Wealth Advisors, which has offices in Natick and Purchase, N.Y. She advises clients on investing, education funding, and estate planning. She holds a master’s in business administration from Boston University.
Jamie Downey has been an accountant for more than 14 years. He's a partner at Downey & Co. in Braintree. Prior to joining the firm, he served as a manager in the audit department of accounting firm KPMG.

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