In short, lenders determine if you are required to pay private mortgage insurance (PMI) based on the loan-to-value (LTV) ratio at the time your mortgage closes. If your LTV ratio is greater than 80% based on your mortgage amount and the appraised fair market value of the property, then you are typically required to pay PMI for conventional loans. If your LTV ratio is 80% or less then you are not required to pay PMI. We provide a comprehensive overview of PMI and when you are required to pay it on FREEandCLEAR.
The source of your equity does not factor into the LTV ratio calculation that is used to determine if you are required to pay PMI nor does it affect how and when PMI is applied. For example, the at least 20% equity position required to avoid paying PMI may come from a down payment funded by personal savings or a gift or it may be existing equity that you already hold in a property you currently own that you are refinancing. This latter scenario applies to properties that you inherit, even if you only inherit a partial ownership interest.
Technically, when you inherit a property you own it. The fair market value of the property minus any mortgages on the property and ownership interests held by other parties equals your equity in the property. So if you inherit 20% of a property and want to buy-out the parties that own the remaining 80%, your equity position should enable you to avoid paying PMI.
There are a couple of points to keep in mind when you refinance a property to buy-out other equity holders. First, it is important that the property value agreed to by the other owners is consistent with the appraised fair market value. If the property value expectations of the other owners is significantly higher than the actual fair market value then your LTV ratio may exceed 80%, which means you may be required to pay PMI.
For example, let's say you own 20% of a property and both you and the other property owners agree that the property is valued at $100,000. That means you are required to pay $80,000 (80% of $100,000 property value = $80,000) to buy-out the other owners. If the property appraisal comes in short, say at $95,000, but the other owners refuse to take less than the $80,000 they agreed to then the LTV ratio is 84% ($80,000 loan amount / $95,000 property value = 84%) instead of 80% and you may be required to pay PMI. This is why it is important to use a conservative property value when you negotiate buying out other equity holders or all parties should agree to use the appraised property value.
The second point to keep in mind is that when you get a mortgage on a property you already own, even if you just inherited your ownership stake, it is technically a cash-out refinance even if you receive no money from the loan and all of the proceeds go to buy out ownership interests held by other parties. Cash-out refinances tend to charge higher mortgage rates so you should keep this in mind when you shop lenders.
I recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area on the table below. We advise you to contact at least five lenders as qualification guidelines vary. Plus, shopping multiple lenders is the best way to save money on your mortgage. You can also use our Free Personalized Mortgage Quote function to receive no obligation mortgage quotes from leading lenders.