The cost of private mortgage insurance (PMI) varies depending on several factors, including the lender. Some lenders charge more than others for the same PMI. In this article, I'll explain why. Then, I'll show you how to get the lowest PMI on your home loan.
What is Private mortgage insurance (PMI)?
PMI is a monthly fee rolled into your mortgage payment that's required when you use a conventional loan to buy a home, and your down payment is less than 20% of the purchase price.
The fee pays for insurance that protects the lender if you default on your mortgage. The insurance lowers the lender's risk of making a loan to you, so you can qualify for a mortgage that you might not otherwise be able to get.
While PMI is an added cost, it enables you to buy now and begin building equity versus waiting years to save up for a 20% down payment.
How much is mortgage insurance?
PMI is a small percentage of the loan amount called the PMI rate. The lender calculates the PMI payment by multiplying your loan amount by the PMI rate, then dividing by 12.
Suppose the loan amount is $475,000, and the PMI rate is 0.45%. In that case, the lender calculates your monthly PMI payment as follows.
- $475,000 × 0.45% = $2,137.50 ÷ 12 = $178.13
Then, the lender adds $178.13 to your monthly mortgage payment.
Remember, this is an example and not the actual PMI. The lender decides the exact PMI rate based on your down payment, credit score, debt-to-income ratio, and other factors.
Check out our Loan Estimate Explainer for more information about closing costs, including mortgage insurance. Talk to a home loan expert to ask questions, get straight answers, and find out how to start on your home loan.
Does the down payment change the PMI payment?
Your down payment percentage affects your PMI rate and monthly payment.
A large down payment means you have more equity in the home, which reduces the lender's risk. As a result, you get a lower PMI payment. On the other hand, a small down payment increases the lender's risk, resulting in a higher PMI payment. (Loan-to-value.)
For example, PMI is cheaper when your down payment is 10% compared to 5%. And you avoid PMI altogether by putting down 20% or more.
The following table compares estimated PMI rates and payments for 3%, 5%, 10%, and 15% down payments on a $500,000 house.
|Down payment percent||Down payment||Loan amount||PMI rate||PMI monthly payment|
Let's say you're buying a house for $500,000.
- If you make a 10% down payment, multiply the loan amount of $450,000 by 0.3% and divide by 12 to get your monthly PMI payments of $112.50.
- If you make a 5% down payment, multiply the loan amount of $475,000 by 0.45% and divide by 12 to get your monthly PMI payments of $178.13 —$65.63 more per month. Your loan amount and principal & interest payments would increase too.
Again, this is just an example. Your actual PMI payments depend on your unique situation and the lender you choose to handle your home loan.
To view actual PMI payments, use our PMI calculator. It's super easy to get current mortgage rates and monthly payments, including PMI, so you know what to expect when buying a home.
Can credit score and debt-to-income ratio affect PMI?
Your credit score and debt-to-income ratio can impact the rate and payment for PMI when buying a home.
Credit score: Your credit score is a measure of your creditworthiness used to determine the risk of lending money to you. The higher your credit score, the lower the risk you pose to the lender, which can result in a lower PMI rate. On the other hand, a lower credit score may indicate a higher risk, resulting in a higher PMI rate.
Debt-to-income ratio (DTI): Your debt-to-income ratio measures how much of your monthly income goes towards paying off debt. A high DTI can indicate that you may have trouble making your mortgage payments, resulting in a higher PMI rate. A low DTI, on the other hand, means you have more disposable income for your mortgage, which can result in a lower PMI rate.
Do some lenders charge more for the same PMI?
The lender can significantly impact the cost of PMI. PMI varies by lender, with some charging more than others for the same mortgage insurance. Here's why.
The lender chooses the PMI company from their list of approved providers. There are seven PMI companies in the U.S., each offering different rates. Still, most lenders use only some of the PMI companies. And when they don't compare PMI rates with all seven, they're likely to miss the lowest. As a result, you get stuck with higher monthly payments.
Unfortunately, most homebuyers accept the lender's PMI without knowing that the same PMI may cost less through a different lender.
Although you can't shop for the cheapest PMI directly through the PMI companies, you choose the lender offering the PMI. Before deciding which lender to use for your home loan, compare how much they charge for PMI. This way, you know you're paying the right amount.
To compare, review page 1 of the lender's Loan Estimate, in the Projected Payments section, where the lender shows you how much monthly PMI costs.
Check out our Loan Estimate Explainer for more information about closing costs, including mortgage insurance.
NewCastle Home Loan compares all seven PMI providers to ensure you get the cheapest PMI for your mortgage. See how much PMI costs with our PMI Calculator.
How long do you pay for mortgage insurance?
PMI isn't forever. The length of time that you'll pay PMI depends on a few things, including the size of your down payment, the amount of your mortgage, and the value of your home.
The more significant your down payment, the lower your mortgage balance, and the faster you will build equity in the house, the sooner you will be able to cancel PMI.
You can terminate PMI by refinancing your current mortgage into a new one that doesn't require it. When refinancing, you must apply for a new mortgage and go through the loan process as you did when you bought the house - except refinancing is much easier.
You can avoid paying PMI if your new loan is 80% or less than the home's current value - if the loan-to-value is 80% or less.
The law provides two ways to remove PMI from your home loan:
- Request PMI cancellation. Once you've built equity of 20% in your home, you can ask the lender to cancel your PMI and remove it from your monthly payments. Submit a written request. Your lender will review it and determine whether you are eligible.
- Automatic PMI termination. Suppose you're current on your mortgage payments. In that case, PMI will automatically terminate on the date when your principal balance reaches 78% of the original value of your home.
What's the difference between private mortgage insurance and FHA mortgage insurance?
Private mortgage insurance (PMI) and Federal Housing Administration (FHA) mortgage insurance premiums (MIP) are both forms of mortgage insurance that protect the lender if you don't make your mortgage payments. However, they're different in a few ways:
PMI is required for conventional loans when your down payment is less than 20% of the home's value. However, MIP is always required for all FHA loans, regardless of the down payment amount.
The cost of PMI varies depending on several factors, including the lender and your creditworthiness. Consequently, you can pay more for the same PMI with different lenders. So, compare PMI payments with a few lenders to ensure you pay the appropriate amount.
On the other hand, FHA's MIP is always the same, no matter which lender you use, because the government determines the MIP rates.
MIP is typically more expensive than PMI. Still, FHA can be cheaper for homebuyers with lower credit scores. For this reason, you should consider an FHA loan if your credit score is less than 680. Visit our FHA loan page for more information.
You can cancel PMI after reaching a certain loan-to-value ratio (LTV) or equity threshold. However, with an FHA loan, you might have to pay MIP for the life of the loan.
- FHA Mortgage Insurance | How much is it? Can you cancel it?
- The Guide to Single-Family Home Mortgage Insurance
Visit our conventional loan page for more information. Feel free to share your opinion by commenting below.