PMI calculator estimates the private mortgage insurance you'll pay for a mortgage loan based on your credit score and a corresponding PMI rate. Private mortgage insurance (PMI) is an insurance policy that you pay when you take out a mortgage loan without committing to at least the 20% down payment most lenders require. PMI rates vary based on your loan-to-value ratio, your credit score, and the lender concerned.
This article explains all the information you need to know regarding PMI, including how to calculate PMI and how to avoid PMI with relevant examples. You can use the PMI calculation to compare various mortgages when you want to purchase a home. If you want a more comprehensive mortgage tool, you can use the mortgage calculator. You can also check out the FHA loan calculator to estimate how much you need to pay if you want to make a down payment as low as 3.5% of the home value.
What is PMI?
Private mortgage insurance, also known as PMI or simply mortgage insurance (MI), is an insurance policy that protects the lender if the borrower fails to make their mortgage payments. Conventional mortgage lenders require PMI for homebuyers who make a down payment of less than 20% of their home purchase price. Thus, PMI allows you to buy a house with a much smaller down payment, but you must pay a mortgage insurance premium along with the home price to offset the risk your lender is taking in case you default or miss payments.
The PMI cost varies depending on the loan amount, the lender, your credit score, and the percentage of the home's price that's left for you to pay. But once you have paid off at least 20% of the home price, your lender can cancel the need for the PMI if you have a good payment history.
According to federal law, lenders must cancel the PMI if you have achieved 22% of home equity; that is, the remaining balance of your loan is 78% of your home's purchase price. At the closing of your mortgage agreement, your lender will provide all the information you need, including when you'll be able to stop paying PMI. But don't forget to ask for cancellation once you reach 20% or remind your lender to cancel your PMI at that 78% LTV!
The insurance premiums are also a standard feature for the government-backed loan FHA loan, allowing as little as 3.5% minimum down payments. Private mortgage insurers set up the PMI to compete with the popular FHA loan. But unlike FHA loan, which insures the entire loan amount for lenders at a lower cost for buyers, PMI only covers about 30% of the loan amount but offers a less cumbersome process to initiate. The insurance industry uses the term "Mortgage Insurance Premium (MIP)" to refer to government-backed insurance, and "Private Mortgage Insurance (PMI)" to refer to that provided by the private firms.
It's important to emphasize that PMI protects the lender from default, not the buyer. So, if you need protection of your own, you need mortgage protection insurance, which protects the buyer from foreclosure if they lose their job, become disabled, or die.
Hence, while PMIs will pay your lender if you miss or fail to make your mortgage payments, a mortgage protection insurance can pay off your mortgage if something unfortunate happens to you. But of course, mortgage protection insurance is an optional extra cost.
If your lender requires you to pay PMI, it will arrange with a private insurance provider to set the insurance plan's terms before your loan is approved. You may need to decide whether to make:
- a one-time upfront payment for your PMI,
- or monthly insurance premium payments,
- or a combination of both methods: you make a partial upfront payment and roll the rest into your monthly mortgage bill.
PMI is not tax-deductible, so consider which option best suits you when planning your payments in addition to your mortgage loan, interest, and taxes.
It's advisable to pay in installments because PMI is not always refundable when you stop holding the mortgage, in case you decide to move or refinance your mortgage. Notwithstanding, the lower your creditworthiness or down payment, the more risk the lender takes, and the higher the private mortgage insurance you'll pay.
How much is PMI?
The amount of private mortgage insurance varies based on the mortgage insurance rates. It could be as low as $30 a month for every $100,000 mortgage loan or as high as over $200!
What is PMI rate?
The PMI rates are the percentage of your loan that you pay as an insurance premium. PMI premium rates usually range from 0.5% to 3% of the original loan amount per year.
The PMI rates vary depending on your:
Credit score: Credit scores predict credit delinquency. A low credit score means you'll need to commit to paying a higher PMI premium as inducement for your loan and insurance policy to be approved.
Most private insurers will not insure a FICO credit score of less than 620.
Down payment: Down payment determines the loan-to-value ratio (LTV). LTV is indicative of how much equity you already have tied into the property. The higher the loan you take than the home's value, the higher the PMI and vice versa. You can request to remove PMI once you acquire 20% equity.
Your lender can then decide if they feel safe to cancel your PMI based on your payment history. Otherwise, you'll have to wait for the loan balance to achieve 22% equity, i.e., 78% LTV, to stop paying the mortgage insurance premiums.
Lender: Different insurance companies offer different PMI rates, but the states mainly regulate them. So, if you're flexible on the state in which you want to buy your home, you have the luxury to shop for different offers. Else, you may have to settle.
If your lender is not insuring the loan itself, it will use a company it has a relationship with or one that covers your financial profile and loan choice. That's where the cost will vary.
The rates will also vary depending on the loan amount covered by the insurer and certain adjustments based on the insurer's discretion.
How to calculate PMI?
Example 1: Calculating PMI cost with PMI rate
Assuming you want to purchase a home for
$100,000 and you can make a
$12,000 down payment. You can calculate your PMI amount as follows:
Step 1 – Determine your loan-to-value ratio.
LTV = mortgage loan / home purchase price Mortgage loan = $100,000 – $12,000 = $88,000 LTV = $88,000 / $100,000 = 0.88 LTV = 0.88 * 100 = 88%
It means you have 88% of the home amount left to pay off.
Step 2 – Multiply the mortgage loan amount by your specific PMI rate according to the lender's chart. You can look up the PMI rate or ask your lender directly. Let's assume your LTV of 88% tallies a PMI of 1.2 %.
PMI = $88,000 * 1.2/100
PMI = $88,000 * 0.0120 = $1,056
You will owe an annual PMI of $1,056.
Step 3 – Divide annual PMI by 12 to find the monthly PMI amount.
Monthly PMI = $1,056 / 12
Monthly PMI = $88
Example 2: How Credit score, LTV, and Adjustments can affect PMI cost
Two friends, Clyde and Trent, each wants to buy homes valued at
$200,000, respectively. Clyde is purchasing the house as his second home, and he can make a down payment of 5% of the purchase price. While Trent is buying the house as an investment, and he can make a 10% down payment.
- We can assume Trent will get a better deal on PMI rate than Clyde based on his down payments or LTV ratio.
But if Clyde has a FICO credit score of 720 and Trent has a credit score of 630, their PMI can differ significantly depending on how the mortgage insurer prices the policy.
Let us consider that the mortgage insurer is the hypothetical OMNInsure.
OMNInsure has an in-house pricing system for mortgage insurance policy calculated based on LTV, FICO score, and individual adjustments if a loan exceeds $400,000. The chart below provides its PMI rates.
The OMNInsure PMI chart
|FICO Credit score||619 and below||620 - 659||620 - 659||700 - 759||760 and above|
|LTV ratios||97.01% and above||0||1.70%||1.20%||0.75%||0.50%|
|95.01% - 97%||0||1.6||1.19||0.74||0.49|
|90.01% - 95%||0||1.5||1.18||0.73||0.48|
|85.01% - 90%||0||1.4||1.17||0.72||0.47|
|85% and below||0||1.3||1.17||0.71||0.46|
|Add adjustments if loan is $400,001 or more.||Second Home||0||-0.10%||-0.10%||-0.10%||-0.10%|
Now, let’s see what their PMI rates will be:
Clyde makes 5% down payment of $500,000
Down payment = 5% * 500,000 = $25,000 Mortgage loan = 500,000 – 25,000 = 475,000 LTV ratio = 475,000 / 500,000 = 0.95 = 95%
FICO credit score = 720
Therefore, according to the chart, Clyde falls into the 4th column (Credit score 700 – 759) and 2nd row (LTV of 95.01% - 97%). That aligns his PMI rate at 0.75%.
But since he's taking a loan of over $400,000, he is qualified to make adjustments that could increase or decrease his PMI. So, the lender will add the applicable adjustments.
According to the chart, OMNInsure believes that people who have a good credit score and buy a second home are unlikely to default on their loans. Thus, the adjustment is -0.10% of any loan over $400,000.
PMI = 0.75% + (-0.10%) = 0.65%
Therefore, Clyde's PMI rate is 0.65%
You can input the data into the PMI calculator to get Clyde's annual and monthly PMI.
On the other hand, Trent has an LTV ratio of 90% with a credit score of 630. That places him in the 2nd column (Credit scores 620 - 659) and 3rd row (LTV of 90.01% - 95%). And since his loan amount does not qualify him for any adjustments, his PMI is 1.5%, which is about 3x Clyde's PMI rate despite making a higher percentage down payment.
How to get rid of PMI?
If you're wondering how to avoid PMI, these are some approaches you can employ. You can:
Compare different lenders. Always compare the rates offered by other lenders. You can search for the lenders' websites to assess the best deals to save you money.
Borrow from no-PMI lenders. Some lenders offer conventional loans without requiring PMIs, but they can charge a higher interest rate on the mortgage loan to cover them from the associated risk.
You will need to calculate and compare the cost of paying the interest rate of these no-PMI loans in the long term versus the cost of paying the PMIs. The difference between the two costs will help you make an informed decision that benefits you the most.
Use lender-paid mortgage insurance (LMPI). Like the no-PMI loans, some lenders offer LMPI, where you pay the PMI cost and the mortgage interest rate throughout the loan's life. This option has a similar high-interest rate.
Piggyback mortgage. You can take a second mortgage or home equity loan simultaneously with the first mortgage in this situation. The second mortgage will cover the remaining down payment, so you can meet the 20% down payment to eliminate PMI.
Using Example 1 above, when you make a 12% down payment on the home price of $100,000, you can take a second mortgage to cover the remaining 8%. This way, you'll have an
'80-12-8'piggyback mortgage. The first mortgage covers 80% of the purchase price, your down payment covers 12%, and the second mortgage covers the final 8%.
This method's drawback is that the second mortgage always carries a higher interest rate than the first. Since it can't be a traditional mortgage loan, the only way to eliminate it is by paying it off or refinancing your first and second loans into a new mortgage plan.
Still, the piggyback mortgage's advantage is that the combined cost of the first and second mortgages is usually less than the first mortgage and PMI payment cost.
Home value appreciation. Your home value may increase or decrease as time passes and inflation sets into the economy. However, lenders are required to terminate PMI when a mortgage's LTV ratio reaches 78% "through a combination of principal reduction on the mortgage and home-price appreciation."
Hence, if you believe your home value has appreciated, you will need to pay for a home appraisal to verify the appreciation amount. You'll then add the amount to the mortgage principal you've already paid to ascertain that you've arrived at the required 78% LTV ratio to request your lender cancel the PMI.
An appreciation allows you to cancel your PMI earlier than expected, but if your home value depreciated, it means that you will have to wait longer to cancel it.
Refinance your mortgage. Refinancing your mortgage means renegotiating your existing mortgage loan agreement, usually to access the equity in your home by taking advantage of a lower interest rate. By refinancing, you are trading in your old mortgage for a new one.
The new loan pays off your initial mortgage, eliminating PMI. Make sure you do your calculations to ascertain that the new mortgage cost is less than the initial mortgage loan cost.
Consider other mortgage loans. The conventional mortgage loan may not always be the best for your financial situation. You can check out cheaper government-subsidized mortgage loan options such as the FHA loan and the mortgage loans from the U.S. Department of Agriculture and the U.S. Department of Veterans Affairs that do not require mortgage insurance.
Pay the 20% down payment. The ultimate solution, though it may not be a feasible option for you. The more down payment you can pay, the better your chances at cutting out expenses that don't count towards paying off your mortgage loan.
Advantages of PMI
- Even though PMIs are designed to protect lenders, they help many borrowers who wouldn't make the 20% down payment become homeowners quicker than it will take them if they were to save for the down payment.
- If you have a good credit score, you will get a relatively low PMI rate, allowing your mortgage to be more affordable.
- Your home can appreciate considerably, allowing you to cancel your PMI earlier than expected while enjoying a good return on the investment made by purchasing your home.
- You can write to your lender to terminate PMI once you've achieved 20% of your home's equity and you have a good payment history. Your lender must cancel PMI once you've reached the scheduled date on your mortgage agreement.