A cash-out refinance typically affects LTV and PMI by?

• A. Decreasing LTV and removing PMI
• B. Keeping LTV the same
• C. Increasing LTV and potentially triggering PMI
• D. Decreasing PMI automatically

Answer: (C)

When you do a cash-out refinance, you replace your existing loan with a larger loan to take cash out. Because you’re borrowing more relative to the home’s value, the loan-to-value (LTV) ratio typically goes up. Lenders see a higher LTV as higher risk, and for many conventional loans, PMI is required once LTV exceeds about 80%. So taking cash out can push you into a situation where PMI is needed again, or where PMI isn’t automatically removed. PMI removal isn’t automatic with a cash-out; it usually depends on reaching a certain equity level or a new appraisal lowering the LTV, which often won’t happen just from refinancing.