Cash-Out Refinance? Don't Forget the PMI
If you have significant equity in your home you may decide to refinance and take a portion of that equity as cash to make home improvements, a major purchase… whatever you decide. But keep in mind if you take too much cash you may be required to pay private mortgage insurance, or PMI − significantly increasing your monthly payments.
PMI is generally required on a home loan with a balance of eighty percent or more of the value of the home. Say you currently owe $100,000 on a $200,000 home; if you refinance, take cash out, and end up with a loan of $160,000 or more you will be required to pay PMI, increasing your monthly payment by approximately $100 (the PMI rate goes up as the amount of the loan goes up).
When you refinance, look at all potential cost repercussions − not just the cost of the loan itself.