Determine PMI you’d pay in home refi

Q: I would have to pay private mortgage insurance if I refi my mortgage. Should I?

A: You first need to know how much you’ll pay for private mortgage insurance, or PMI, which protects the lender in case you default. Hint: It’s probably not what you’re paying now. If your credit scores have improved or your equity has increased, PMI might cost you substantially less than you’re paying now.

PMI is typically required when you don’t have a 20 percent down payment or 20 percent equity in the property. Annual PMI premiums usually range from 0.3 percent to 1.5 percent of the amount borrowed. Other factors that influence what you pay, besides loan-to-value and credit scores, are loan size, the loan term and “coverage,” or how much of a loss the insurer will cover.

You may need to know the PMI coverage percentage if you’re using one of the many available PMI calculators to estimate how much your monthly payment is likely to be. With 10 percent equity or less, PMI typically covers a loss to the lender of up to 30 percent of the loan balance. With equity closer to 20 percent, it’s 12 percent.

Another way to find out the cost is to simply ask a lender.

If you have at least 10 percent equity in your home, you have other options to consider, such as a second mortgage, either a home equity loan or line of credit, to avoid PMI. There is also lender-paid mortgage insurance, in which you pay a slightly higher interest rate in exchange for your lender paying the insurance in an up-front lump sum.

The interest on both alternatives is tax-deductible, which isn’t the case with PMI. But unlike regular mortgage insurance, lender-paid mortgage insurance doesn’t “fall off” or end when you have sufficient equity. You pay the higher interest rate until you sell or refinance.

No one really knows when interest rates will rise, or how fast, said mortgage expert Dick Lepre, who writes the RateWatch weekly newsletter. So the question to ask is whether you can save money now.

Lepre suggests you first calculate whether you can save money with a no-cost refinance — one that doesn’t require you to pay anything out of pocket. If you can’t save much, then you probably shouldn’t refinance.

If you could lower your payment, though, then you proceed to the next step, which is seeing how much you can save by paying closing costs yourself.