Anita Holley knows first-hand the advantages of having private mortgage insurance.

Because Holley and her husband didn't have enough money for a 20% down payment when buying a $1 million home in Virginia in 2007, they were required to buy private mortgage insurance, or PMI, to help guarantee the loan if they default.

Thanks to PMI, they bought the home with no money down and a 7% loan fixed for 30 years.

Their home, however, is now worth half what they paid for it. They're trying to refinance through the Home Affordable Refinance Program, or HARP, and they're having difficulties refinancing through their current lender.

Mortgage insurer may be reluctant

For a homeowner with PMI, mortgage refinance with the original lender through HARP can be difficult because HARP requires the new loan to provide the same level of mortgage insurance coverage as the original loan.

That can be difficult for the current lender to do, given that they're taking on a greater risk, and the company that handles mortgage insurance on an existing loan must be willing to have high loan-to-value ratio (LTV) and be willing to work with a lender to make the transfer, says Dale Siegel, a mortgage broker and owner of Circle Mortgage Group in Harrison, N.Y.

"The borrower needs to know what the new PMI is going to be calculated at and know it's still worth it dollar for dollar," Siegel says.

If a current lender won't refinance a PMI mortgage through HARP, homeowners are allowed under HARP 2.0 to go to any lender to refinance.

Higher rate may result

If the PMI is transferred to another loan, the borrower may be charged a higher rate and be required to have a higher credit score, Siegel says. The higher the LTV, the higher the PMI and other fees can be, she says. An LTV of 200% in a HARP refinance is rare, and even 125% is high, she says.

To help avoid the higher PMI fees that can come with refinancing a loan at a high LTV, Siegel suggests trying to improve your credit score and working with your current lender.

For the Holleys, who are trying to refinance their home, "there's no rhyme or reason" to why the lender is taking more than seven months so far to approve the new loan, Anita Holley says.

How PMI works

Some lenders require PMI when the LTV is 80% or more. For example, if a house that was bought for $160,000 is now worth $100,000, and the homeowner owes $120,000 on the mortgage, the LTV would be 120%, and refinancing that loan would require mortgage insurance.

The insurance is used to pay back the loan if the homeowner defaults, and is one risk factor that lenders use to determine if someone is eligible for a loan.

Some lenders, and PMI companies, may not want to refinance a mortgage if the loan is for a lot more than the value of the house.

About HARP

To get a HARP refinance, there are many qualifying criteria, among them that the mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae, which must have acquired the mortgage before June 1, 2009. Determining which lender has your loan can be looked up on a government website.

HARP was created by the federal government in 2009 to help underwater and near-underwater homeowners refinance their mortgages, meaning they owed more than the home was worth. It targeted homeowners who were current on their mortgage payments, but couldn't refinance because home prices kept dropping.

HARP was originally required an LTV of 105% to qualify, and was later changed to 125% LTV. So if someone owed $125,000 on a property worth $100,000, they'd still be allowed to refinance.

The rule was changed in December 2011 through what's called HARP 2.0. The new rule allowed no limit on negative equity for mortgages up to 30 years. PMI was no longer needed to refinance a loan.

Published on May 15, 2013