Getting rid of PMI on investment real estate property can be nearly impossible with declining real estate values.
Q: We bought an investment property for $76,000 about 7 years ago with no money down. Our interest rate is at 7.5 percent. We would love to get rid of the private mortgage insurance (PMI) on the property as well as refinance it, but the property prices keep going lower and lower. The home is worth about what we owe on the property.
A: We doubt you’ll be able to get rid of the private mortgage insurance (PMI) until you have paid down a bit more than 20 percent of the original loan amount that you owed the lender.
The whole point of paying PMI was to be able to buy the property at all – without the customary 20 percent down in cash. In today’s real estate environment, if you don’t have cash or equity in the property, you’ll still have to pay PMI, which has only gotten more expensive.
Plus, if you were buying an investment property today, and in the current housing and real estate market, your lender would require you to put down at least 30 percent in cash, and possibly more. If you try to refinance, your lender would perhaps offer you a $50,000 mortgage, and require you to have $25,000 in the property.
If your investment property is returning money and you can afford the payments, you’re in luck. While you have not had any appreciation on the value of the property, it appears that you have not lost out as many real estate property values have declined.
Keep your property maintained, keep your tenants happy, and as rental incomes increase in your area, you can benefit from that income. At some point in the future if values go back up, you may be able to refinance the property at that time. But for now, you are probably not going to find a lender willing to refinance your property.
However, if you’d like to give it a shot, depending on the type of property you own, you can try to find a mortgage broker that still handles real estate investor loans and talk to him or her about your situation. You might find that even if you had ample equity in the property that a mortgage broker might quote you about the same rate you now have, but the costs and expenses of refinancing an investment property could be quite high.
Obviously, you’d get rid of the PMI upon refinancing (if you have the required equity), but you should look at your loan documents. You’re in your seventh year of your loan and you may find out that the PMI will automatically go away in or around the tenth year of your loan. You might want to review the documents to determine the type of loan product you have. You should have various documents in your file that contain disclosures about your mortgage insurance product.
You might find that waiting the three or so years might be well worth it depending on how well your investment property is doing. Given that your loan balance is rather low, even in good times you might have trouble finding a lender willing to finance such a low balance mortgage loan.