If the homeowner were not already paying for PMI, the added cost could nullify much of the benefit of refinancing, so the homeowner could be effectively prohibited from refinancing. In this scenario, the loan-to-value ratio would be 120%, and if the homeowner chose to refinance, he would also have to pay for private mortgage insurance. Further, assume the homeowner owes $120,000 on the mortgage.
Take for example a house that was purchased for $160,000 but is now worth $100,000 due to the market decline. Later, these same homeowners were prevented from taking advantage of lower interest rates through refinancing, since banks traditionally require a loan-to-value ratio (LTV) of 80% or less to qualify for refinancing without private mortgage insurance (PMI). Many new homeowners saw the value of their homes drop below the balance of their mortgages, or nearly so. As inventories soared nationwide, home prices plummeted. Millions of borrowers found themselves in a difficult predicament after the U.S.
