When you apply for a home loan or refinance your mortgage, your lender may require you to pay for an additional type of insurance: private mortgage insurance.
when do you have to pay private mortgage insurance (pmi) and how much will it cost? It depends on your loan-to-value (LTV) ratio. find out when you have to pay pmi and learn how to calculate the cost.
what is pmi?
pmi is a type of insurance that lenders require for certain mortgages with high ltv rates. lenders always accept some level of risk with mortgages. however, pmi can help reduce the risk that comes with some mortgages.
Although you pay PMI as a borrower, this insurance does not protect you. instead, it protects the lender. If you default on your mortgage, PMI pays part of the remaining loan balance to the lender.
however, pmi offers you some benefits as a borrower. paying pmi can help you qualify for a conventional loan that you might not otherwise be eligible for.
when is pmi required?
You may have to pay PMI if you are buying a home or refinancing your mortgage. Lenders may require PMI on certain loans if:
- Your down payment is less than 20%. most conventional lenders require a down payment of at least 20% of the purchase price. You can calculate your down payment percentage by dividing the amount you plan to put down by the market value or purchase price of the home, whichever is less. If you can’t afford at least 20% down on a purchase, you may need to pay PMI.
- To refinance loans, your loan-to-value ratio is greater than 80%. If you’re refinancing your current mortgage, most conventional lenders require an LTV ratio of 80% or less to avoid having to pay PMI. You can calculate your LTV ratio by dividing your new mortgage amount by the market value of your home. if your ltv is over 80% you may need a pmi.
who provides pmi?
As a buyer, you do not choose your pmi supplier. Instead, lenders arrange PMI directly with the provider of your choice, so you don’t have to take any extra steps. pmi rates can vary between lenders and mortgage types.
If you have to pay PMI, your lender will set up the payment and coverage, connecting the PMI directly to your loan. That means you don’t have to worry about remembering an extra payment or providing proof of PMI. instead, your lender automatically charges it.
when do you pay the pmi?
There are a few ways to handle pmi payments. Some lenders may allow you to choose a payment method. others require you to accept a specific option. The most common PMI payment methods include:
- monthly premium – Paying a monthly premium is the most common pmi option. In this case, your lender automatically adds PMI to your monthly mortgage payment. you won’t have to make a large payment up front, but your monthly payments will be higher.
- premium up front: Instead of paying every month, you can have the option to pay the total cost at once. In this case, your lender arranges for you to pay the PMI when you close the loan. while it is an additional closing cost, your monthly mortgage payment will be lower.
- monthly and up-front premiums: Alternatively, your pmi may be a combination of the two previous methods. In this case, your lender arranges for you to pay a portion of your PMI at closing and adds the rest to your monthly mortgage payments.
how much does pmi cost?
On average, PMI costs range from 0.22% to 2.25% of your mortgage. how much you pay depends on two main factors:
- your total loan amount: As a general rule, pmi expenses are higher for larger mortgages.
- your credit score Credit: Lenders typically charge borrowers with high credit scores lower PMI percentages.
Lenders often keep charts showing the percentage of PMI to be charged in various situations. you can ask your lender for a specific percentage to make your calculations easier.
how to calculate pmi
To calculate your pmi, ask your lender for their pmi percentage or use the range below. then follow these steps:
- identify the property value. you can get the exact figure from a recent appraisal or estimate it using the amount you plan to offer on the house.
- find the total loan amount. To estimate your PMI for a refinance, start with your current mortgage balance. for a new mortgage, subtract the down payment from the price of the house.
- calculate the ltv. Divide the loan amount by the value of the property. then multiply by 100 to get the percentage. If the result is 80% or less, your PMI is 0%, which means you do not have to pay PMI. if it is more than 80%, continue to the next step.
- calculate your annual pmi premium. Take the PMI percentage provided by your lender and multiply it by the total loan amount. If you don’t know your pmi percentage, calculate the upper and lower ends of the standard range. use 0.22% to calculate the low end and use 2.25% to calculate the high end of the range. the result is your annual premium. To estimate your monthly premium, divide the result by 12.
can pmi be reduced or eliminated?
If you’re worried about this added expense, you’ll be relieved to know that PMI typically ends before your loan, as lenders only require you to pay PMI while your LTV is above 80%. once your ltv is below 80%, you can request to stop paying pmi.
To determine when your loan will reach the point where you no longer need PMI, lenders use an amortization schedule. If you chose to pay PMI at closing, your lender has already used this program to calculate the full PMI amount. In most cases, you can’t lower or get a refund of your initial premium.
If you pay a monthly premium, you may be able to drop the PMI a little sooner, as lenders drop the PMI automatically when it’s scheduled to hit the 78% LTV point. You may qualify for early termination from pmi if you meet the following criteria:
- Your LTV is 80% or less
- Your loan began on or after July 29, 1999, when the Homeowners Protection Law began
- You are at day on your mortgage payments
Call your lender to cancel pmi early if you meet these requirements. Typically, your lender will request a broker’s price opinion (BPO) to confirm the current market value of your home. Your lender needs this information to calculate your current LTV. If your home’s value has dropped significantly, your LTV may have increased, which could disqualify you for PMI early termination.
As a borrower, you usually have to pay for the bpo or appraisal, which can cost a few hundred dollars. however, depending on your monthly premium, ending pmi early could save you hundreds or thousands of dollars.
how to avoid paying pmi
In many cases, you can avoid paying PMI altogether. Some of the following strategies could help you save on PMI costs. ask your lender to help you do the math to find the most affordable option for you.
make a down payment of 20% or more
When planning to buy a home, review your savings to calculate the maximum down payment you can afford. If you can afford at least 20% of the home price, you can avoid paying PMI. To get to the 20% mark, you may need to save a little more or reconsider the home you want to buy.
pay off your current mortgage balance
if you plan to refinance your home but the current ltv is over 80%, consider paying off more of your mortgage balance first. If your mortgage servicer doesn’t penalize you for prepayments, you may want to consider paying off more of your mortgage right away. otherwise, you may have to wait until you’ve made a few more monthly payments.
get a higher interest loan
Some lenders may offer alternative options even if your LTV is above 80%. Ask your lender about higher-interest loans, which can help you manage risk without charging you PMI. If you’re not sure if a higher interest loan is worth saving on PMI costs, ask your lender for a direct comparison.