Private Mortgage Insurance (PMI) Calculator 2021CASAPLORERTrusted & Transparent
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance, also known as PMI, is a form of mortgage insurance for conventional home loans to protect the lender in case the borrower cannot make their mortgage payments and defaults. Mortgage insurance ensures lenders can recover some of their lost investment and allows more individuals to become homeowners by reducing the risk for lenders.
Breakdown of Costs
Total Cost Breakdown
What You Should Know
- If you put less than a 20% down payment on your conventional mortgage, you are required to pay for private mortgage insurance
- Private mortgage insurance protects the lender in the case that you are not able to make your mortgage payments and thus default on the loan
- PMI rates range, on average, from 0.55% to 2.25% of the original loan amount
- Your PMI premiums can be removed once you build 20% equity in your home
- There are different types of PMI, which include borrower-paid mortgage insurance, lender-paid mortgage insurance, single premium mortgage insurance, and split-premium mortgage insurance
- Government-backed loans such as FHA-loans require mortgage insurance premiums (MIP)
Do I need to get PMI?
The lender will require you to get PMI or insurance for your loan if you decide to put less than 20% down payment of the total loan amount. For example, if the total mortgage amount is $300,000 and you only have $45,000 for the down payment, which is 15% and is less than the required 20%, then you will need to buy PMI for the home loan.
How Much Does PMI Cost?
PMI rates on average can range from 0.55% to 2.25% of the original loan amount. At those rates, for a $300,000 30-year fixed rate mortgage, PMI would cost anywhere from $1,650 to $6,750 per year, or approximately $137.50 to $562.50 per month. PMI can be paid upfront or it is included in the monthly mortgage payments.
What Factors Determine the PMI Rate?
The PMI rate you will receive for your home loan depends on several factors such as:
Size of Home Loan – The higher your total loan amount, the higher the PMI rate. The reason being the lender has additional risk if you have a larger loan amount and smaller down payment. For example, if you decide that the maximum value of your down payment will be $50,000, the PMI rate will be higher for a home loan of $500,000 rather than a smaller home loan of $300,000.
Down Payment Amount – PMI is required for all home loans where the down payment is less than 20%. However, even within less than 20%, your PMI rate can change based on your down payment amount. You can decide to put as low as 3% on certain loans such as Conventional 97 which is a home loan for individuals who want to put up a small down payment. Smaller down payments will result in a higher PMI rate. Therefore, there will be a big difference in the PMI if you put 18% down rather than 3%.
Credit Score – A higher credit score will result in a lower PMI rate as you are seen as more creditworthy and less likely to default on payments. You need to have a credit score of at least 620 to be eligible for a conventional home loan. If you have a credit score less than 620, check out other options such as the FHA Home Loan which offers home loans for credit scores as low as 500.
Type of Mortgage – PMI rates tend to be higher for adjustable-rate mortgages (ARM) as compared to fixed rate mortgages. Adjustable-rate mortgages result in higher PMI rates because interest rates can increase, which will increase monthly payments and put more pressure on borrowers, resulting in higher chances of default.
What Are the Different Types of Private Mortgage Insurance?
There are various types of PMI based on how the payment is structured:
Borrower Paid Monthly Mortgage Insurance (BPMI)- This is the most common type of PMI where your mortgage insurance is included in your monthly payments thereby increasing your monthly expense. This type of PMI works best if you are unsure of how long you are planning on keeping the mortgage because there is no upfront cost to you.
Single Premium Mortgage Insurance (SPMI)- In this form of PMI, instead of doing monthly payments, you decide to pay the total PMI amount upfront thereby not increasing your monthly payments. This form of PMI would be suggested if you have funds available at closing of the home, and that way your monthly expense will remain lower. An advantage of this form of PMI is that it might help you qualify for a larger home loan because you paid the PMI upfront.
Lender Paid Mortgage Insurance (LPMI)- Although this sounds great that the lender is footing the bill for the mortgage, it is a bit more complicated than that. The lender indeed does pay the PMI, but they also increase the interest rate on your loan in order to cover the PMI. Essentially you pay for the PMI by getting a higher interest rate on your home loan. The disadvantage of this type of PMI is that the interest rate does not reduce once you reach a loan-to-value of 78% because you’re locked into that interest rate.
Split-Premium Mortgage InsuranceThis is the least common type of PMI as it is a combination of monthly paid insurance (BPMI) and single premium insurance (SPMI). The way this type of PMI works is that you pay a portion of the PMI upfront and pay the rest of the PMI in monthly payments as part of the mortgage payments. This might be used by individuals who cannot pay the entire PMI upfront but can cover a portion in order to reduce their monthly costs. For example, on a $500,000 home, with a PMI rate of 1.5%, the total PMI amount is $7,500, but if you decide to pay $3,000 upfront, only the remaining amount of $4,500 is added to your monthly mortgage payments for the first year.
When Can I Stop Paying PMI?
PMI for home loans can be removed if you satisfy at least one of the following:
You achieve a 78% Loan-To-Value ratio of the purchase price of the home – If you make enough payments such that your LTV is 78%, then PMI should automatically be removed by the insurer. You can also get PMI manually removed when you have 20% ownership in the house, but you will have to reach out to your insurer to get it removed. In most cases, it takes homeowners 11 years to own enough equity in the home to get PMI removed. For example, on a $300,000 home price, if you have $234,000 outstanding in your mortgage, then you have achieved 78% LTV ($234,000/$300,000) and PMI would be removed.
You pass the halfway point of your mortgage term - On a 30-year mortgage, for example, PMI must be removed 15 years into the loan. This is true even if the mortgage balance exceeds 78% of the original purchase price of the house.
You refinance your mortgage -The last way to get rid of PMI is to refinance your mortgage such that the new loan balance is less than 80% of the home’s current value. This will allow you to avoid paying PMI after the refinancing of the mortgage.
What is the LTV ratio?
The LTV or loan to value ratio is the portion of the value of the house that you are borrowing through a mortgage. In other words, the percentage of your home’s value that is financed by the mortgage.
Example - Imagine that you want to purchase a house that costs $100,000 and you can only afford to make a 10% down payment. What is your LTV ratio?
Down Payment = 10% * House Price = 10% * $100,000 = $10,000
Mortgage Amount = House Price – Down Payment = $100,000 - $10,000 = $90,000
LTV ratio = Mortgage Amount /Home Value = $90,000/ $100,000 = 90%
Why Do I Need to Pay for PMI When it is For The Lender’s Benefit?
The reason for this is because the lender is taking on additional risk by lending to you while you’re putting up less money upfront (<20% down payment) and can default on future payments.
However, it is important to understand that it is beneficial for you too because if PMI or insurance was not an option, lenders may not have offered a mortgage for anything less than a 20% down payment, preventing a lot of individuals from becoming homeowners.
PMI also has an additional benefit because lenders can give you a better mortgage rate if you take PMI. The reason for this is because PMI allows lenders to recover a greater portion of their investment as compared to individuals who do not take PMI, allowing them to give you a better rate on your mortgage.
Is PMI Tax Deductible?
PMI is tax-deductible! Just like other forms of mortgage insurance, PMI can be deducted when you file your income tax return. With the Further Consolidated Appropriations Act of 2020, Congress allowed for deductions until December 31st, 2020. It is also available for 2019 and 2018.
How to Calculate your PMI cost?
In order to use the calculator provided above, you will need to input some of the specifics on the home you are trying to purchase and the mortgage you are applying for. First and foremost, if your down payment is 20% or more, you won’t need to pay for private mortgage insurance at all. Next, in order to calculate your monthly mortgage insurance premium, the following will be needed:
Home purchase price – When all other variables stay fixed, the higher the home purchase price, the higher your private mortgage insurance will be. This is because the mortgage insurance rate is multiplied by the loan amount to find your annual mortgage insurance. For the same down payment, a higher home purchase price means that the loan amount will be bigger, and this exposes the lender to more risk, therefore the private mortgage insurance premiums will be higher as well.
Mortgage Insurance Rate – As mentioned above, the mortgage insurance rate is multiplied by the loan amount to find out the premium. A higher mortgage insurance rate means that you will pay a bigger amount on private mortgage insurance.
Down Payment – The down payment you make is deducted from the home purchase price to find out how much financing you will need from the lender. Your private mortgage insurance premiums will be determined based on the amount you borrow.
Example – Calculating PMI
You want to purchase a home that costs $350,000. Since you can only afford to put a 15% down payment, you are required to pay for private mortgage insurance. Your lender notifies you that your mortgage insurance rate will be 0.55%. How much will your monthly PMI premium cost?
1. Down Payment
= 15% * $350,000
2. Loan amount = Home Purchase Price – Down Payment
= $350,000 - $52,500
3. Annual PMI = Loan Amount * Mortgage Insurance Rate
= $297,500 * 0.55%
4. Monthly PMI
= $1636.25 / 12
You will have to pay approximately $137 each month for PMI.
In order to find out the total PMI premium, the loan interest rate and loan term will be needed. These inputs are used to find out when you will reach an LTV of 80%, so that your PMI can be removed. Depending on the period of time you will have to pay PMI premiums, the Total PMI premium is determined by the PMI calculator.
What Does Private Mortgage Insurance Cover?
When you take out a mortgage and you cannot afford to put a 20% down payment, the lender is at risk. First, since you cannot afford to make a 20% down payment you are viewed as a riskier borrower. Secondly, when the lender has to lend you more money than they would have with the 20% down payment, a greater amount of money is put at greater risk. Therefore, lenders turn to private mortgage insurance companies to assume some of that risk.
The coverage a private mortgage insurance company offers determines what portion of the amount lost the lender will be able to recover in the case that the borrower defaults on their mortgage. For example, if the PMI provider provides 30% coverage, this means that the lender will be paid back by the insurer for 30% of the losses related to the borrower’s default. These losses can include the unpaid principal balance, interest that the lender would otherwise get, and 30% coverage for the lenders’ costs associated with the foreclosure.
For example, imagine that you wish to purchase a $300,000 home with a 5% down payment. The coverage provided by the PMI company is 30%. If you then default on your mortgage while you still owe 90% or $270,000 to the lender, the lender would be able to recover $81,000 from PMI, instead of losing the whole amount. This can help supplement the amount recovered from a foreclosure. PMI would also cover 30% of interest loss and foreclosure costs.
Higher coverage means that the borrower will pay higher insurance premiums. When the lender is lending a lot of money to the borrower and there is a high risk of default, the lender can agree to lend if they are protected by a greater insurance coverage. The PMI company will provide this coverage at a higher cost that the borrower will have to bear.
Private Mortgage Insurance Companies
MGIC – Mortgage Guaranty Insurance Corporation
MGIC is a subsidiary of MGIC Investment Group and it provides private mortgage insurance to lenders of home mortgages across the U.S. The company offers primary coverage and pool insurance. Primary coverage gives the opportunity to people to become homeowners with less than 20% down payment and protects the lender against default. Pool insurance covers losses that are bigger than claim payments in the case of default. MGIC currently operates in all the states of the U.S., Puerto Rico, and Guam. MGIC is one of the largest private mortgage insurance companies which has more than 20% share in the market of PMI providers.
Radian Guaranty Inc.
Radian Guaranty Inc is the primary subsidiary of Radian Group. The subsidiary is in the business of providing private mortgage insurance to lenders and offers various mortgage, real estate, and title services. Radian Guaranty Inc. provides PMI on first-lien mortgage accounts and pool insurance. Currently, Radian works with more than 3,500 residential lenders to make homeownership possible for Americans. Its revenues account for half of the total revenues of its parent company.
Essent Guaranty Inc.
Founded in 2008, Essent Guaranty is headquartered in Pennsylvania and is a subsidiary of Essent Group. To protect home mortgage lenders and mortgage investors, the company offers mortgage insurance and loss management services. The company is approved by Fannie Mae and Freddie Mac and is currently licensed in every state in the U.S. and the District of Columbia.
National Mortgage Insurance Corporation
National MI is another U.S.-based top company that specializes in mortgage insurance and risk protection services for mortgage lenders and investors. The parent company of National MI is NMI Holdings. NMI Holdings ranked 24th in Fortune's list of 100 Fastest-Growing Companies for 2020. Moreover, National MI has been recognized by Fortune in the list of Best Workplaces in Financial Services and Insurance in March 2021.
PMI on FHA Loans
FHA loans are a type of non-conventional loans backed by the Federal Housing Administration in the U.S. FHA loans offer various advantages to conventional loans. For starters, FHA loans have looser financial requirements for borrowers and allow for smaller down payments. Since these are government-backed loans, it means that in the case that the borrower defaults on their payments, the government agency will partially or fully pay the lender for the losses incurred. This is why lenders can assume a bigger risk and offer more favorable requirements. For example, if you have a credit score of at least 580, you can qualify for an FHA loan with only 3.5% down payment. When your credit score is between 500 and 580, you would have to put at least 10% down.
While conventional lenders use PMI, FHA-lenders protect themselves by mortgage insurance premiums (MIP)against borrowers who present a high risk of default. MIP is typically made of an upfront payment of around 1.75% of the loan amount and an annual premium that ranges from 0.45% to 1.05% of the loan amount. That is why MIP often proves to be more expensive than PMI. Key differences between MIP and PMI include:
Upfront Premium – As mentioned above, MIP requires the borrower to pay an upfront premium of 1.75%. This premium can either be paid upfront or can be rolled over into the loan balance. If you choose to go with the second option, the higher loan balance will lead to a higher interest expense. PMI, on the other hand, only requires an upfront payment if you are getting Single-premium mortgage insurance or a Split-premium mortgage insurance.
Cancelling Mortgage Insurance - The biggest difference between MIP and PMI is that you cannot cancel your mortgage insurance with MIP once you reach 20% equity in your home. If you have initially put at least 10% down, you are required to pay MIP for 11 years of the loan. On the other hand, if you have put a down payment of less than 10%, you are required to pay MIP for the whole life of the loan. The only way that you can stop paying for MIP is if you refinance your loan into a non-FHA loan product.
Contribution by Seller – With FHA loans, the seller is permitted to contribute to closing costs up to 6% of the home’s purchase price. This means that the seller can also pay for some or all of the upfront mortgage premium. In conventional loans, sellers are allowed to contribute up to only 3%.
|Payment Structure||Annual fee (Except for SPMI and Split-Premium Mortgage Insurance)||Upfront Payment + Annual Fee|
|Mortgage Insurance Rate||0.55% - 2.25%||Upfront: 1.75% Annually: 0.45% - 1.05%|
|Down Payment||< 20%||For all FHA loans, no matter the down payment|
|Credit score||Has an impact on the rate||Does not have an impact on the rate|
|Cancelation||Once an LTV ratio of 78% is reached||After 11 years – for down payments of at least 10% For the entire loan term – for down payments of less than 10%|
|Lender||Private institutions||FHA-approved institutions|