How much is PMI on a mortgage?
Private mortgage insurance (PMI) is usually between 0.19% and 1.86% of your mortgage balance. And you sometimes need to pay an upfront premium on closing, too.
But how much you have to pay will depend on the type of mortgage you choose, how much you put down, and — with some loans — your credit score.
Private mortgage insurance (PMI) is normally needed if you make a down payment on your loan that’s less than 20% of the home’s value.
Read on to discover:
- What is PMI?
- The different rates for different types of mortgage
- Which loans take your credit score into account and which don’t
- How to calculate your PMI
- Is PMI worth it?
- 4 ways to avoid PMI
What is PMI?
First, we need to clear up some jargon. PMI is technically the term for mortgage insurance paid on conventional loans. When government-backed loans charge mortgage insurance, it’s officially called mortgage insurance premiums (MIPs).
But most people nowadays don’t differentiate between the two. And we’re going with the flow and calling them all PMI.
Not all mortgage insurance is bad
Many homeowners hate PMI because they have to pay for it, even though it gives them no immediate benefit. It exists to protect the lender in the event you default and end up in foreclosure.
But PMI’s bad reputation isn’t wholly deserved. It’s often the only way you can get on the first rung of the homeownership ladder — unless you have enough savings to make a 20% down payment.
And those who complain about it frequently find they make way more through rising home prices than PMI costs them.
The different rates for different types of mortgages
The rules that govern how much you pay for PMI can be quite complicated. So only bother to get your head around those of the following that you think you might choose.
Conventional loans
These are mortgages that aren’t backed by the government. So they are either offered privately or through Fannie Mae or Freddie Mac, which are government-sponsored enterprises, rather than the government itself.
There’s good and bad news for PMI. The good news is you don’t have to make an initial payment on closing. And that the starting annual rate is a very attractive 0.19% of the loan value.
But the bad news is that few pay such a low PMI rate. Lenders include credit scores in their PMI calculations for conventional loans. And borrowers with only fair credit (580-669, according to FICO’s definition) could find that annual charge is sky-high — assuming they can get approved at all.
Conventional loans: The mortgage insurance math
The top rate for mortgage insurance on a conventional loan is 1.86%. On a $250,000 loan that would be $4,650 in your first year, which is $387.50 monthly.
On the other hand, those who have stellar credit scores and exceptionally sound finances could pay that ultralow starting rate of 0.19%. That comes in at $475 a year or $39.58 a month on that $250,000 loan.
If we take a middling figure of 1%, that would be $2,500 a year or $208.33 a month.
All those are rough figures. They partly depend on your mortgage interest rate and other factors. But we’ll tell you how to calculate yours with a bit more precision in a minute. Just recognize that you won’t know for sure until you get preapproved by a mortgage lender or request a loan estimate.
Of course, most homebuyers pay somewhere between those two extremes. But you can see why borrowers with lower scores often shun conventional loans, and instead frequently turn to other loan options, like FHA loans.
Check your home buying eligibility. Start here (Nov 21st, 2024)FHA loans
These are government-backed loans, which means a portion of your borrowing is guaranteed by the Federal Housing Administration.
The FHA ignores your credit score when it calculates your PMI (or, technically, your MIP). So it’s way friendlier to those with only fair credit.
But, typically, you have to pay a one-time super-premium of 1.75% of the loan value when you close. And, after that, 0.85% annually, payable monthly.
For our $250,000 loan, that’s $4,375 on closing and a $2,125 annual premium — or $177 a month. You’d need to be a pretty good borrower to get such a low monthly payment with a conventional loan.
But there’s a catch. With conventional mortgages, you can stop paying PMI when your loan balance falls to 80% of your home’s original purchase price. But, with FHA ones, you remain on the hook for the entire life of the loan unless you move home or refinance.
Check your FHA eligibility. Start here (Nov 21st, 2024)USDA loans
There are two relevant good points about this program:
- You don’t need to make a down payment. Literally nothing, though you may get a better mortgage rate if you can put down something.
- PMI (MIP) costs are lower than for FHA loans and many conventional ones.
The typical PMI charges are 1% on closing and 0.35% annually. For our $250,000 example loan, that’s $2,500 on closing and $875 annually ($72.92 monthly).
Check your eligibility for a USDA loan. Start here (Nov 21st, 2024)
VA loans
Another government-backed program, this time managed by the Department of Veterans Affairs. The program has some unique characteristics:
- Zero down payment
- Low mortgage rates
- No continuing PMI or MIP
Take note of the word “continuing.” While you won’t have to make regular monthly mortgage insurance payments, there is an initial payment due when closing your home purchase. It’s called the VA funding fee — rather than mortgage insurance — but it serves the same purpose.
So how much is the funding fee? The first time you use the program, it’s 2.3% of the loan amount and less if you choose to make a 5% or 10% down payment. After that, it’s 3.6% for each subsequent loan. But, again, lower rates apply with a down payment of 5% or 10% and higher.
For our $250,000 example loan, that’s $5,750 on closing with zero down on your first loan. Sounds a lot? Not when you remember you won’t spend a penny more on PMI.
Not sure if you’re eligible for a VA loan? Learn more here.
Check your VA home loan eligibility. Start here (Nov 21st, 2024)How to calculate PMI
In theory, calculating PMI is easy. You just do what we did in our examples: Take the loan value and multiply by x%, with x the relevant mortgage insurance rate.
That’s easy for FHA, VA, and USDA loans because each of those has its own flat-rates. But it’s more complicated for conventional mortgages because your credit score and other factors are going to play a part in the math.
So, with these conventional ones, you can’t be certain how much your PMI premiums will cost you until you actually apply to multiple lenders and receive quotes.
But you probably have a fair idea of your credit score and down payment. And, if you have 800+ credit and 10% down, you might assume you’re going to pay the lowest rate (0.19% annually) or close to it. Meanwhile, if your is 620-640, you might expect to pay the highest (1.86% annually) or close to it. And, if your score is somewhere close to the middle, you could use 1% as a rough guide, while expecting the final number to be a bit higher or lower.
How to figure out your entire mortgage insurance payment
The key figure you need to know before signing a mortgage loan agreement is how much your total monthly payments will be.
You’ll have to allow more for maintenance and repairs. And you may need to add some additional monthly costs, such as homeowners’ association fees (if you’re buying in an HOA) and extra insurance if the property is susceptible to flooding, earthquakes, hurricanes, or other special risks.
But, for most homebuyers, the costs they need to know are:
- Principal and interest
- Private mortgage insurance
- Property taxes
- Homeowners insurance
Luckily, The Mortgage Reports has a suite of mortgage calculators that will give you a monthly payment breakdown. You can even add in your HOA dues manually. There’s one for conventional loans and three others specifically for FHA, USDA, and VA loans, as well as a refinance calculator.
Ready to buy a home? Start here. (Nov 21st, 2024)Is PMI worth it?
The answer to that question largely depends on how quickly home prices are rising in the area where you want to purchase. What PMI essentially buys you is the ability to cash in on appreciating values before you’ve saved the lump sum needed for a 20% down payment.
Of course, it brings other homeownership benefits, too. But, from a financial standpoint, it’s that early ability to benefit from home price inflation that’s key. Suddenly, you see rising real estate prices as a plus, rather than something to watch with dread.
Check out your local market
So, if you want to buy somewhere that currently has stagnant prices or even falling ones, you may prefer to wait until you’ve saved up a 20% down payment before buying. Even then, you might hesitate.
But if home prices are shooting up there, PMI could turn out to be a very sound investment — with a handsome return.
At the time of writing, home prices are rising nationwide. But that covers some extreme local variations. So don’t look just at national figures. Investigate the market where your next home will be.
5 tips to avoid paying PMI
1. Make a 20% down payment
But that might not be an option for you. So what are the other four?
2. Pay down your mortgage
The federal Homeowners Protection Act (HPA) provides rights for homebuyers over the termination of PMI payments. But it does not apply to FHA and USDA loans — and isn’t needed for VA ones.
Under that law, your PMI payment obligations must automatically terminate when your mortgage balance is scheduled to reach 78% of the original valuation of your home. The only condition is that your payments must be current at that time.
This has nothing to do with rising home prices. It’s your home’s original appraised value on purchase (or the contract sales price, whichever is lower) that’s used. And the date is exactly predictable: You can find it on your amortization table.
You can also request in writing that PMI payments stop when that figure reaches 80%. But that earlier cancellation brings some extra conditions that don’t apply to automatic terminations at 78%.
These include: A good payment history. No second mortgages. So no home equity loan or home equity line of credit (HELOC). You may be asked for a fresh appraisal to confirm that your home hasn’t lost value since you bought it.
If your PMI payments are a burden, your payments are up to date and you can fulfill those conditions, it may be worth the hassle of making your application.
3. Pass the halfway point of your home loan term
Your PMI must also be terminated when you reach the midpoint in your mortgage term. (Remember, this does not apply to FHA and USDA loans). The Consumer Financial Protection Bureau explains:
“There is one other way you can stop paying for PMI. If you are current on payments, your lender or servicer must end the PMI the month after you reach the midpoint of your loan’s amortization schedule. (This final termination applies even if you have not reached 78 percent of the original value of your home.) The midpoint of your loan’s amortization schedule is halfway through the full term of your loan. For 30-year loans, the midpoint would be after 15 years have passed.”
4. Refinance
If you’ve come into some money or your home’s value has appreciated enough for you to attain 20% equity, then refinancing can enable you to remove PMI.
Of course, that’s likely to come with closing costs. But, with mortgage rates the way they’ve been recent, you might be able to reduce your monthly mortgage payment at the same time. You may well end up with a lower rate and lower monthly payments, even leaving aside your PMI savings.
And you can then refinance from any type of mortgage to any type of mortgage for which you qualify. Even FHA loans don’t have PMI if you put down 20%.
5. Piggyback mortgages
You may be able to avoid PMI altogether, provided you’ve managed to save a 10% down payment. You can do this through a piggyback mortgage, also known as 80/10/10 financing (though you can find 75/15/10 versions if you’re buying a condo).
Have you guessed how this 80/10/10 business works? You have your 10% down payment and you borrow another 10% as a second mortgage, often a HELOC. That means your main mortgage is only 80% of the home’s value and you’re effectively putting down 20%.
Obviously, everybody would be doing this if there weren’t some downsides. And those include:
- Typically, a higher rate on the smaller mortgage.
- It’s harder to qualify. You’ll need good credit and not too many other debts.
- It can be more difficult to refinance.
Still, some find this an effective way of avoiding PMI. You can learn more here.
The bottom line
PMI isn’t the evil that many homebuyers seem to think. But you have to look at it as an investment: the price of benefiting from rising home prices. And like all investments, you need to run your figures and assess your risks.
Click here for today's mortgage rates. (Nov 21st, 2024)
