What Does Private Mortgage Insurance (PMI) Cost?
Understand Private Mortgage Insurance (PMI) costs. Learn what influences your premiums and how to manage or remove this mortgage expense.
Private Mortgage Insurance (PMI) is a financial product for individuals purchasing a home with a conventional loan. It is typically required when a homebuyer makes a down payment of less than 20% of the home’s purchase price. Its primary purpose is to protect the mortgage lender from financial loss if a borrower defaults on their loan.
Factors Determining PMI Cost
The cost of Private Mortgage Insurance varies based on several factors unique to each borrower and loan. A significant determinant is the loan-to-value (LTV) ratio, which compares the loan amount to the home’s value. Generally, a higher LTV ratio, resulting from a smaller down payment, leads to a higher PMI rate because it signifies greater risk for the lender.
A borrower’s credit score also plays a substantial role in determining PMI rates. Individuals with higher credit scores are viewed as lower risk, often resulting in lower PMI rates. Conversely, a lower credit score can result in higher PMI premiums. The type of loan, such as a fixed-rate versus an adjustable-rate mortgage (ARM), can influence the cost, with ARMs sometimes carrying higher PMI.
The debt-to-income (DTI) ratio, which measures a borrower’s monthly debt payments against their gross monthly income, can similarly affect PMI costs. A higher DTI ratio might indicate a greater financial burden, leading to a higher PMI rate. PMI rates can differ between lenders, making it beneficial for borrowers to compare offerings when seeking a mortgage.
PMI is typically calculated as an annual percentage of the original loan amount, ranging from approximately 0.22% to 2.25%. This annual premium is divided into twelve installments and usually paid monthly as part of the overall mortgage payment. For instance, on a $200,000 loan, an annual PMI rate of 1% would amount to $2,000 per year, or about $167 per month.
How PMI is Structured and Paid
Private Mortgage Insurance can be structured and paid in different ways, each impacting a borrower’s financial outlay. The most common method is Borrower-Paid PMI (BPMI), where the premium is added as a separate line item to the homeowner’s monthly mortgage payment. This amount is collected by the loan servicer and remitted to the PMI provider.
Another option is Single Premium PMI (SPPMI), where the entire PMI premium is paid as a lump sum at the loan closing. This upfront payment can sometimes be financed into the loan amount, which would increase the principal balance and subsequently the monthly principal and interest payments. However, it eliminates recurring monthly PMI charges.
Lender-Paid PMI (LPMI) is an arrangement where the lender covers the PMI premium. In exchange, the borrower typically accepts a slightly higher interest rate on the mortgage loan. While the borrower does not see a distinct PMI charge on their monthly statement with LPMI, the cost is embedded within the higher interest rate paid over the life of the loan.
Ending PMI Payments
Homeowners can cease Private Mortgage Insurance payments under specific conditions, which impacts the total cost over the loan’s duration. The Homeowners Protection Act of 1998 (HPA) mandates automatic termination of PMI for conventional loans originated on or after July 29, 1999. This occurs when the principal balance of the mortgage reaches 78% of the home’s original value, provided the borrower is current on their payments.
A borrower can request to cancel PMI earlier. This is generally possible when the loan balance reaches 80% of the home’s original value. To qualify, the homeowner must submit a written request, maintain a good payment history without recent late payments, and be current on their mortgage. An appraisal may be required to confirm that the property’s current value has not fallen below its original value.
Refinancing a mortgage provides another pathway to eliminate PMI. If a homeowner refinances their loan and the new loan-to-value ratio is 80% or less, PMI will generally not be required. This can be particularly advantageous if the home’s value has appreciated significantly or if the borrower has paid down a substantial portion of the principal balance.