Mortgage companies must be hurting for business right now because I was shocked at a commercial I heard on the radio this morning. In an attempt to get people to refinance their mortgages, it used fear-mongering tactics that would have made the President proud.
The ad started off by saying that private mortgage insurance, or PMI, is required on all loans where the loan to value ratio is greater than 80%. That's true. However, the ad then went on to talk about the declining housing market and how homes may now have lost equity. Your loan, the ad warned, may now be above an 80% LTV! Don't be hit with an added PMI charge on your mortgage - refi now!
First of all, there is truth in the statement that the housing market has declined and equity may have been lost, thus pushing your LTV over 80%. But, and this is the deceptive part, I have NEVER heard of any lender that regularly appraises the houses their mortgages are based on to make sure they stay above 80% LTV! Never! If the loan is being paid on time, no one at the bank is going to ask for a new appraisal. The ONLY time a new appraisal will be obtained is if the house is sold or the loan refinanced. In short, PMI will not suddenly be added to a mortgage that does not already include it, despite what the ad implies.
When you stop to think about this ad, it doesn't even make sense. If a loan truly did rise above 80% LTV due to falling home values, and the current loan did not have PMI, then refinancing it would only serve to ADD PMI, no matter what, because a new appraisal would be obtained, thus verifying the higher LTV.