Why would refinancing my mortgage increase my PMI, even though rates are lower?
Is that an FHA loan you have? And you're wanting to do one of those low cost FHA re-fi's, right? The answer is that in between when you first got that loan and now, the government's changed the rules on PMI for FHA loans. It more than doubled the amount of monthly PMI you have to pay.  The new rates, efective April 18th, 2011, as as follows: It used to be 0.50% per year for the 30 year. So that's why the PMI would go up.  There is another rule in play too, specific to that no-cost FHA refi -- the government requires that the combined (principal+interest+pmi) monthly payment after the refi is at least 4% lower than the current payment. Note that the no-cost refi does not require a new appraisal.  Some options present themselves, but only if you can show some equity in a appraisal: 1) if an appraisal shows at least 10% equity, you can go refi to a standard mortgage. You might even be able to find one that doesn't require PMI at that level. If you have 20% equity, you're golden -- no pmi. 2) See what the monthly payment will be if you refi to the 15 year FHA mortgage. Between the much lower PMI, and the much lower interest rates (15 year is usually about 0.75% less than a 30 year), it might not be much more than what you're paying now. And you'd save a huge amount of money over time, and get out from that PMI much earlier (it stops when your principal drops below 80% of the loan amount). This would require that reappraisal. The PMI rate is calculated at the time your mortgage is underwritten to be terminated at the point where you have 20% equity in your home.  It is calculated based off of default risks based on your current equity value at the time of the loan.  So if you got your mortgage before the banking crisis those risk charts have changed dramatically and not in your favor. So lets say you have a 100k home which you put 10k down so you have a mortgage of 90k.  Since you have accumulated an additional 5k equity so payoff value is now 85k.  If you refinance your mortgage and the home values in your area have dropped 15% you now are borrowing 100% of the value of your home.  So you have higher risk from being at 100% as opposed to 90%.  And the PMI is for the 20% of equity you do not have that the bank can not expect to recover.  So when you originally bought the house your PMI pay out was 10k.  At 85K value and 100% borrowed the PMI payout will be closer to 18k.  While you may still be able to sell your home for the original value when they do the refinance calculations they use what your area has trended.  If that is the case you maybe be able get an actual appraisal to use but that will come out of your pocket. *Disclaimer: These are simplifications of how the whole complex process works if you call the banker they can explain exactly why, show you the numbers, and help you understand your specific circumstances.  * There are deals out there which allow refinancing up to 125% of appraised value so long as you have a solid payment history. You need to research banks in your area working with HARP funded mortgages.  An alternate method is to find a bank that will finance 80% of the current value at 4% and the rest as a HELOC. The rate will be higher on the equity line, but the average rate will be better and you can pay the line off faster.
That's why they're taking the deal. But it's not like they completely stole all that money. I don't have any stats, but I'd assume most of those people who got their loans are still in their homes. (Sorry, I could be way off. Please correct) But they still are bastards for not letting me refinance. Could have just been because they saw this penalty coming. The key word you are looking for is that you want to refinance the loan at a lower rate. Tell banks that and ask what they can offer you. "It can be a good thing for the bank to refinance your loan for you - since you will be keeping the loan at that particular institution.  This gives them more time to enjoy the free money you pay them in interest for the remaining life of the loan. Banks that offer ""No closing costs"" are betting that mortgage payers will move their mortgage to get the lower interest rates - and whomever holds the loan, gets the interest payments." "I am going to respond to a very thin sliver of what's going on.  Skip ahead 4 years. When buying that house, is it better to have $48K in the bank but a $48K student loan, or to have neither?  That $48K may very well be what it would take to put you over the 20% down payment threshhold thus avoiding PMI. Banks let you have a certain amount of non-mortgage debt before impacting your ability to borrow. It's the difference between the 28% for the mortgage, insurance and property tax, and the total 38% debt service.  What I offer above is a bit counter-intuitive, and I only mention it as you said the house is a priority. I'm answering as if you asked ""how do I maximize my purchasing power if I wish to buy a house in the next few years?""" "This doesn't say the whole story (like the length of the HELOC). if you have 15 years left on a mortgage and ""refinance"" into a 30 year HELOC then yes, your payments maybe 20% lower, but you add 15 years to pay it off.  Just remember that interest occurs daily on what you owe. If you move 100K of debt from 5% mortgage to 6% HELOC you'll be paying more to the banks no matter how you slice it." The primary reason to put 20% down on your home is to avoid paying PMI (private mortgage insurance).  Anyone who buys a house with a down-payment of under 20% is required to pay for this insurance (which protects the lender in case you default on your loan). PMI is what enables people to buy homes with as little as 3-5% down. I would recommend against paying more than 20%, because having liquidity for emergency funds, or other investments will give you the sort of flexibility that's good to have when the economy isn't so great.  Depending on whether the house you purchase is move-in ready or a fixer-upper, having funds set aside for repairs is a good idea as well. "A re-financing, or re-fi, is when a debtor takes out a new loan for the express purpose of paying off an old one. This can be done for several reasons; usually the primary reason is that the terms of the new loan will result in a lower monthly payment. Debt consolidation (taking out one big loan at a relatively low interest rate to pay off the smaller, higher-interest loans that rack up, like credit card debt, medical bills, etc) is a form of refinancing, but you most commonly hear the term when referring to refinancing a home mortgage, as in your example. To answer your questions, most of the money comes from a new bank. That bank understands up front that this is a re-fi and not ""new debt""; the homeowner isn't asking for any additional money, but instead the money they get will pay off outstanding debt. Therefore, the net amount of outstanding debt remains roughly equal. Even then, a re-fi can be difficult for a homeowner to get (at least on terms he'd be willing to take). First off, if the homeowner owes more than the home's worth, a re-fi may not cover the full principal of the existing loan. The bank may reject the homeowner outright as not creditworthy (a new house is a HUGE ding on your credit score, trust me), or the market and the homeowner's credit may prevent the bank offering loan terms that are worth it to the homeowner. The homeowner must often pony up cash up front for the closing costs of this new mortgage, which is money the homeowner hopes to recoup in reduced interest; however, the homeowner may not recover all the closing costs for many years, or ever. To answer the question of why a bank would do this, there are several reasons: The bank offering the re-fi is usually not the bank getting payments for the current mortgage. This new bank wants to take your business away from your current bank, and receive the substantial amount of interest involved over the remaining life of the loan. If you've ever seen a mortgage summary statement, the interest paid over the life of a 30-year loan can easily equal the principal, and often it's more like twice or three times the original amount borrowed. That's attractive to rival banks.  It's in your current bank's best interest to try to keep your business if they know you are shopping for a re-fi, even if that means offering you better terms on your existing loan. Often, the bank is itself ""on the hook"" to its own investors for the money they lent you, and if you pay off early without any penalty, they no longer have your interest payments to cover their own, and they usually can't pay off early (bonds, which are shares of corporate debt, don't really work that way). The better option is to keep those scheduled payments coming to them, even if they lose a little off the top. Often if a homeowner is working with their current bank for a lower payment, no new loan is created, but the terms of the current loan are renegotiated; this is called a ""loan modification"" (especially when the Government is requiring the bank to sit down at the bargaining table), or in some cases a ""streamlining"" (if the bank and borrower are meeting in more amicable circumstances without the Government forcing either one to be there). Historically, the idea of giving a homeowner a break on their contractual obligations would be comical to the bank. In recent times, though, the threat of foreclosure (the bank's primary weapon) doesn't have the same teeth it used to; someone facing 30 years of budget-busting payments, on a house that will never again be worth what he paid for it, would look at foreclosure and even bankruptcy as the better option, as it's theoretically all over and done with in only 7-10 years. With the Government having a vested interest in keeping people in their homes, making whatever payments they can, to keep some measure of confidence in the entire financial system, loan modifications have become much more common, and the banks are usually amicable as they've found very quickly that they're not getting anywhere near the purchase price for these ""toxic assets"". Sometimes, a re-fi actually results in a higher APR, but it's still a better deal for the homeowner because the loan doesn't have other associated costs lumped in, such as mortgage insurance (money the guarantor wants in return for underwriting the loan, which is in turn required by the FDIC to protect the bank in case you default). The homeowner pays less, the bank gets more, everyone's happy (including the guarantor; they don't really want to be underwriting a loan that requires PMI in the first place as it's a significant risk). The U.S. Government is spending a lot of money and putting a lot of pressure on FDIC-insured institutions (including virtually all mortgage lenders) to cut the average Joe a break. Banks get tax breaks when they do loan modifications. The Fed's buying at-risk bond packages backed by distressed mortgages, and where the homeowner hasn't walked away completely they're negotiating mortgage mods directly. All of this can result in the homeowner facing a lienholder that is willing to work with them, if they've held up their end of the contract to date." If you can get a mortgage with 10% downpayment and the seller will accept (some may want at least 20% downpayment for whatever reasons) and with PMI it still lower than your rent, sounds like it's a good idea to buy now.  Of course this assumes that the money you'd be otherwise saving for 20% downpayment will be used to pay off a mortgage faster. FHA insured loans must 'go hand in hand' with PMI, because the FHA element is the insurance itself.  The FHA isn't actually giving you a loan, that's coming from a lender; instead, the FHA is insuring the loan, at some cost to you - but allowing a loan to folks who may not be able to afford it normally (lower down payment requirements and a somewhat cheaper PMI). FHA-insured loans may be lower rates in some cases than non-FHA insured loans because of this backing; that's because they make it easier for people of poorer credit histories with smaller down payments to get a house in the first place.  Those people would tend to have a harder time getting a loan, and be charged sometimes usurious rates to get it.  Low down payment and mediocre credit history (think 580-620) mean higher risk, even beyond the risk directly coming from the poor loan to value ratio. Comparing this table of Freddie Mac rates to this table of FHA-backed loan rates, the loan rates seem comparable (though somewhat lagging in changes in some cases).  FHA loans are not nearly the size or complexity of loan population as Freddie Mac, so be wary of making direct comparisons. Looking into this in more detail, pre-collapse (before 12/07), FHA rates were a bit lower - average rate was about .5 points lower - but starting with 12/07, FHA average rates were usually higher than Freddie Mac rates for 30 year fixed loans: in 1/2009 for example they were almost a point higher.  As of the last data I see (5/13) the rates were within 0.1 points most months. This may be in part because Freddie Mac had looser requirements to get a loan pre-collapse, then tightened significantly, then started to loosen some (also around June 2013, rates climbed significantly due to some signals from the Fed, although they're almost back to their lows thanks to the Fed again).  These are averages across all loans, so you get some noise as a result. Loan interest rates are very personal, in general: they depend on your credit, your house and down payment, and your bank (which varies by your location).  The best thing to do is to shop around yourself and just see what you get, and ask your lender any questions you have: if you pick a local lender with a good service history and who is willing to talk to you in person (ie, has a direct phone number), you'll have no trouble getting answers. In a lot of cases, the bank has already made their money. Shortly after you get your mortgage is sold to investors though the bank is still servicing it for a fee. Therefore, if you refinance, they get to sell it again. Yes, PMI is what the lender requires to loan you more than 8O% of the home's value. I could easily present scenarios where it's exactly the right decision to use PMI and get the purchase done. A 100K mortgage at 90% LTV will cost you $521/year in PMI.  If you are renting and struggling to get a higher downpayment, it can take quite a long time to save the additional $11K to put down. Only the buyer can know if the house is such s bargain, or if rates have bottomed, but the decision isn't so clear cut. PMI (Private Mortgage Insurace) is not part of foreclosure. It is part of the MORTGAGE process. Say a bank wants a 20% down payment, for a mortgage and you can only put up 5%. You can take out PMI for the 15% difference. The bank will force you to do this every year (usually for lesser amounts) until your house has risen enough in value so that you have 20% equity.  That's because banks want a maximum loan to value (LTV) ratio of 80% (sometimes less, nowadays).  OK, by allowing you to buy a house with skimpy equity, PMI increases the chance of foreclosure. yeah, i get that it's not optional. just sucks that nothing has changed substantially since i closed on the loan 11 months ago (same PMI, same HO, essentially the same property taxes) and now i have to pay more. seems like the closing docs could have taken into account timing of those payments so that i primed the pump with enough from the beginning. It doesn't matter.  You will just renew your mortgage at the prevailing rates.  That's part of the mortgage contract.   The problem that happens is if you want to move your mortgage to another bank for a better rate, they may not accept you.  Your re-negotiating position is limited. Most mortgages have a portability option where you can even transfer the mortgage to another property, but you'd have to buy a cheaper house. Streamline refinance is the way to go.  You don't have to stay with the same bank to do so either.  The big advantage of the streamline is the original appraisal is used for the refinance, so as long as you didn't have negative amortization(impossible in FHA anyways), you're good to go.  It will be much less paperwork and looser credit standards.  The ONLY downside is that upfront and monthly FHA mortgage insurance ticked up from where it was 2 years ago.  If you're under a 80% LTV however you won't have to worry about it.