Although you're the one who pays for private mortgage insurance, it's your lender who gets the coverage. PMI protects lenders from losing money if you default on the loan. Even if you didn't have to take out PMI on your original mortgage, you may have to do it when you refinance.
The basic rules for PMI are similar whether you're taking out a mortgage or refinancing one. Lenders usually require PMI when the borrower makes a down payment of less than 20 percent. With that much down payment, however, it's assumed that you have enough skin in the game that it's in your best interest to keep up payments and keep the house. With a refi, there's no down payment, so the lender looks at your equity -- the home's value above the mortgage. If the equity is less than 20 percent, expect to be required to provide PMI.
The value of your house isn't frozen in amber. If housing values go up, your equity can grow to more than 20 percent, even if you haven't paid that much on the mortgage. If values go down, you may have only 10 percent equity or less, despite years of steady payments. When you apply for a refi, the lender will probably require an appraisal. The results will show you and the lender whether your equity is at the magic 20 percent mark or not.
If you do have to take out PMI, factor it in with other closing costs when deciding whether to refinance. Refinancing to a lower interest rate is good, but the costs -- the appraisal, PMI, loan application fees and so on -- usually run around 3 percent to 6 percent of the loan amount. Crunch numbers and see how long it will take for your lower monthly payments to make that money back. If you expect to move before then, refinancing is a money loser.
If your equity is too low and you have to take out PMI, it doesn't last forever. Once you shrink your refi down to 80 percent of your home value -- or if rising values do that for you -- you can request your lender cancel PMI. When it gets down to 78 percent, it's supposed to happen automatically. Lenders don't always rush to process the paperwork, so keep writing and asking if it isn't happening fast enough.
A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.