Why Do I Need PMI to Refinance My Mortgage Loan?

Have you been turned down for refinancing because you lacked PMI coverage? Are you confused as to why this happened? If so, this article may shed some light on the subject. Here’s why some homeowners need PMI in order to refinance their mortgage loans.

I recently received the following email question from a reader: “I have tried to refinance my home with Citi mortgage under the Gov. Mortgage Assistance Program but was told after they did an appraisal that I don’t qualify because I am not paying PMI. The seller paid PMI when I purchased the home. Is this true? The home appraised at 273,00 and I owe 257,000.”

So why would a lender require PMI for a refinance loan? To answer this question, we need to start with a quick refresher on what PMI is in the first place, and why it’s a requirement on certain loans. Here’s a quick definition to start things off:

Private mortgage insurance (PMI) refers to any insurance coverage that protects the mortgage lender against loss if the borrower defaults on the loan. In other words, PMI is designed to protect the lender — not the borrower. But the borrower incurs the cost of the coverage.

There are two common scenarios where home buyers or homeowners must pay for PMI coverage:

• If a home buyer gets a mortgage loan and puts less than 20% down, they’ll have to pay for a PMI policy.
• In the case of refinancing, a homeowner with less than 20% equity will typically have to pay PMI as well. So if the amount you are seeking from the lender is greater than 80% of the home’s current appraised value … you’re probably looking at PMI.

You’ve probably heard that it’s harder to qualify for mortgage loans and refinance loans these days. This is true. But it’s also harder to get PMI coverage, and for the very same reasons. Nobody on the financial sector is willing to take big risks right now. Remember AIG? They were the 800-pound gorilla in the PMI business, and they insured a lot of bad loans. That’s why AIG needed a bailout to save itself (which is another article entirely).

Let’s get back to the topic at hand — why you need PMI to refinance your mortgage loan.

PMI for Refinancing

Using the loan-to-value numbers provided by this reader, we can see that he currently has 6% equity in the home. The loan balance is 94% of the home’s appraised value. This falls short of the 20% rule, which means PMI is going to come into play. Remember, any time you borrow more than 80% of your home’s value (wether it’s for the initial purchase or to refinance the home), you will most likely have to pay for PMI coverage.

Of course, you can eventually cancel the PMI policy when you have 20% equity in the home. This happens when your home value rises, when you pay down your balance, or through a combination of the two.

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