Private mortgage insurance (PMI) is an extra expense many people pay with their mortgages. PMI is something a lender charges with conventional loans when homeowners borrow more than 80% of the value of a house they buy, and this extra fee is something they must pay until they build enough equity in the house they own. If you are currently paying PMI and believe that you now have enough equity to eliminate it, you could refinance to get rid of it. Here are several things to know about refinancing and PMI.

Your Lender Will Drop the PMI at a Certain Point

Lenders are required to drop PMI from loans when borrowers have 22% equity in a house. This means that when you reach the point where you owe only 78% of the home's value, your lender should drop the PMI. While you could wait for this to happen, there are times when refinancing is the better option.

Why Refinancing Is Often a Better Option

Refinancing is often the better way to get rid of PMI for several reasons. The first reason is that you do not have to pay PMI if you owe only 80%, or less, of the home's value. If you reach the 80% point, you technically could get rid of the PMI, but your lender will not remove it until you hit the 78% point. This means that if you refinance, you could eliminate it faster.

Secondly, PMI is based on the value of your home. If your home value increased a lot since you purchased the home, you might have more equity in the house now than you thought you had. And, you might have a lot more equity in the house than your mortgage lender assumes you have. This means that you might be able to refinance and eliminate the PMI a lot faster than you could if you simply waited for your lender to drop it.

You Should Make Sure You Can Get a Good Rate

If you decide to do this, there is one important thing to consider, which is the interest rate. If you cannot qualify for a lower interest rate than the rate you currently have, refinancing might not make a lot of sense at this point. If this is the case, it might be of more value to wait a while, until you can qualify for a lower rate. If you have questions about this, talk to a lender who offers refinancing services like Tennessee Home Mortgage.