If you’re financing a home with a conventional (non-government) loan and less than 20 percent down, you’ll almost certainly pay for private mortgage insurance (PMI). The cost of PMI varies among borrowers, but most don’t know what factors determine their premium, or how to pay less. MoneyGeek’s Private Mortgage Insurance Calculator shows you what your premium would be based on your credit score, loan-to-value ratio and loan type. Even better, it shows you what small changes – raising your FICO a few points, increasing your down payment or changing your loan term – can do to save you money.
How to Use the MoneyGeek Private Mortgage Insurance Calculator
PMI protects mortgage lenders, making homeownership possible for buyers with smaller down payments. If borrowers default, and foreclosure sale proceeds aren’t enough to repay the mortgage balance, private mortgage insurers cover the shortfall.
|Input||What To Input|
|Home Value||If buying a home, enter the purchase price or the home’s appraised value, whichever is lower. If refinancing, enter your best estimate of the property value.|
|Credit Score||Input your FICO credit score. If your credit report shows two scores, use the lower one. If there are three scores, enter the middle score. If you don’t know your FICO, you can estimate it.|
|Down Payment (dollars)||Enter the dollars available for your down payment. If refinancing, estimate the amount of home equity in dollars. Don’t include your closing costs in this amount.|
|Down Payment (percentage)||If you prefer, you can choose to enter your down payment or home equity amount as a percentage of the home’s purchase price or estimated value.|
|Loan Length||Enter the term of your loan in years. Most mortgages are either 15 or 30 years long, but can be of any length. PMI rates are lower for loans with terms of 20 years or less.|
|Interest Rate||Enter the “stated” or “advertised” interest rate, not the annual percentage rate (APR), which includes the loan’s costs. Lenders must disclose APR when they advertise, but your mortgage payments are based on the stated rate.|
|Payments per Year||Most mortgages require 12 monthly payments per year. However, if you plan to make 26 bi-weekly payments or additional monthly payments, include the extra payments here.|
|Output||What the Output Means|
|Upfront Costs||You may be able to wrap upfront insurance costs into your loan. Insurers base your upfront costs on your credit score, loan type and loan-to-value ratio. Riskier borrowers – relatively speaking – pay more than low-risk borrowers. In other words, the higher your credit score and the larger your down payment, the less you will pay.|
|Mortgage Loan Monthly Payment||This includes your monthly principal and interest, based on your loan amount and stated interest rate, plus your estimated monthly mortgage insurance. Your payment will probably also include property taxes and homeowners insurance.|
|Monthly Mortgage Insurance Cost||This is your monthly premium for the first year. Every year, your new premium is calculated based on your remaining balance. Coverage drops altogether when the balance is paid down to a 78 percent loan-to-value.|
How to Avoid PMI
PMI is considered a “necessary evil” by many homebuyers, but it’s possible to avoid paying it. You can avoid PMI by taking one of these three tactics:
Increase Your Down Payment
Larger down payments bring several advantages. You can reduce or eliminate your PMI costs, save on mortgage interest because you’re financing less, and reduce your mortgage costs, because a lower loan-to-value ratio makes you a more desirable borrower. In the Tale of Three Mortgages, increasing the down payment from 3 percent to 10 percent saves the borrower $115 per month – enough to buy a new car or a bucket-list vacation in about five years! And that’s just on mortgage insurance. A buyer with a 700 FICO score could also save 0.5 percent in upfront costs ($900), and $10,647 in interest over the life of the loan.
Find a Lender Offering Lender-Paid Mortgage Insurance
Most people pay PMI in monthly installments. However, it can also be paid in a single premium, upfront. According to mortgage insurer Genworth, a borrower with 10 percent down and a 740 FICO score pays 0.41 percent of the mortgage balance per year, or a one-time premium of 1.29 percent of the initial loan amount.
You can see how the single premium might be much cheaper after about four years. But what if you don’t have the money? Mortgage insurers allow the lender to pay it for you. For a 90 percent loan to a borrower with a 740 FICO, lender-paid mortgage insurance (LPMI) premium is 2 percent.
Advantages of LPMI
LPMI can save you money in the long run. Depending on how much of the single premium savings your lender passes on to you, your monthly costs can be significantly lower. This might allow you to purchase a more expensive home, or simply reduce your costs. You’ll want to compare the mortgage payment with LPMI to the mortgage payment with monthly borrower-paid PMI and see which one is better. Finally, if your adjusted gross income exceeds $54,500 ($109,000 for married couples filing jointly), PMI is not tax deductible, while mortgage interest is. After taxes, LPMI might be a better deal for you.
Disadvantages of LPMI
LPMI comes with some disadvantages, however. Monthly borrower-paid PMI coverage gets cheaper over time as your loan balance is paid down, and it drops off altogether when your loan-to-value (LTV) reaches 78 percent. However, LPMI is built into your mortgage interest rate. It never goes down, and it never goes away – unless you pay off the loan. When considering LPMI, use a mortgage calculator to create an amortization schedule, and see what year your mortgage LTV will reach 78 percent. If you plan to have your home (and your mortgage) longer than that period of time, LPMI may not be for you.
LPMI Bottom Line
Obviously, lenders don’t pay your mortgage insurance premiums to be nice – they do it to secure your business, and they pass those costs on to you in the form of higher mortgage rates. However, depending on the interest rate you’re offered, your tax situation and your mortgage insurer’s pricing structure, LPMI could save you money. Compare monthly payments and the total costs over the time you expect to keep the loan, and choose the best alternative for your situation. A smart lending professional should be able to help you sort out your options.
Choose a Piggy-Back Mortgage
The “piggy-back” isn’t a specific mortgage product, it’s a combination of loans – an 80 percent first mortgage, plus a purchase-money second mortgage. The structure of a piggy-back loan reflects its structure. For example, an 80-10-10 loan has an 80 percent first mortgage, a 10 percent second mortgage and a 10 percent down payment. An 85-15-5 loan requires 5 percent down, and an 80-20 loan provides 100 percent financing with no down payment at all.
The interest rate for the second mortgage is usually higher than that of the first mortgage, and the combination can be less expensive than mortgage insurance.
Who Offers PMI?
Many mortgage insurers shut their doors during the Great Recession and foreclosure crisis, and the remaining companies aren’t exactly household names. Here are some of the main players:
- Arch MI
- National MI
Most lenders have relationships with more than one insurer. Insurers’ underwriting guidelines are similar, but not identical, and their rates can differ.
Can You Shop for Private Mortgage Insurance?
Mortgage lenders normally choose your mortgage insurance for you and tell you what you’ll pay. But are you stuck with the provider selected by your lender? Not necessarily. Some programs might be better for you than others – Radian, for example, includes unemployment coverage that pays several months of mortgage payments if you lose your job. Ask your lender to show you all available options, and choose the coverage and premium you prefer. Alternatively, you can view rate cards and guidelines for each company on their Web sites and decide for yourself.
When you choose a mortgage with mortgage insurance, you need to consider the entire package – lender fees, mortgage rates, and insurance costs. Otherwise, your “great deal” may not be that great after all.