Private Mortgage Insurance (PMI) Calculator 2021CASAPLORERTrusted and Transparent
What is Private Mortgage Insurance (PMI)?
Private mortgage insurance, also known as PMI, is a form of mortgage insurance for conventional home loans to protect the lender in case the borrower cannot make their mortgage payments and defaults. Mortgage insurance ensures lenders can recover some of their lost investment and allows more individuals to become homeowners by reducing the risk for lenders.
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Do I need to get PMI?
The lender will require you to get PMI or insurance for your loan if you decide to put less than 20% down payment of the total loan amount. For example, if the total mortgage amount is $300,000 and you put your maximum amount of $45,000 for the down payment, that is 15%, which is less than the required 20%, you will need to buy PMI for the home loan.
How much does PMI cost?
PMI rates on average can range from 0.40% to 2.25% of the original loan amount. At those rates, for a $300,000 30-year fixed rate mortgage, PMI would cost anywhere from $1,650 to $6,750 per year, or approximately $137.50 to $562.50 per month. PMI can be paid upfront or it is included in the monthly mortgage payments.
What factors determine the PMI Rate?
The PMI rate you will receive for your home loan depends on several factors such as:
- Size of Home Loan – The higher your total loan amount, higher the PMI rate. Reason being the lender has additional risk if you have a larger loan amount and smaller down payment. For example, if you decide that the maximum value of your down payment will be $50,000, the PMI rate will be higher for a home loan of $500,000 rather than a smaller home loan of $300,000.
- Down Payment Amount – PMI is required for all home loans where the down payment is less than 20%. However, even within less than 20%, your PMI rate can change based on your down payment amount. You can decide to put as low as 3% on certain loans such as Conventional 97 which is a home loan for individuals who want to put up a small down payment. Smaller down payments will result in a higher PMI rate. Therefore, there will be a big difference in the PMI if you put 18% down rather than 3%.
- Credit Score – A higher credit score will result in lower PMI rate as you are seen as more creditworthy and less likely to default on payments. You need to have a credit score of at least 620 to be eligible for a conventional home loan. If you have a credit score less than 620, check out other options such as the FHA Loan which offers home loans for credit scores as low as 500.
- Type of Mortgage – PMI rates tend to be higher for adjustable rate mortgages (ARM) as compared to fixed rate mortgages. Adjustable rate mortgages result in higher PMI rate because interest rates can increase, which will increase monthly payments and put more pressure on borrowers, resulting in higher chances of default.
What are the different types of Private Mortgage Insurance?
There are various types of PMI based on how the payment is structured:
- Borrower Paid Monthly Mortgage Insurance (BPMI) – This is the most common type of PMI where your mortgage insurance is included in your monthly payments thereby increasing your monthly expense. This type of PMI works best if you are unsure of how long you are planning on keeping the mortgage because there is no upfront cost to you.
- Single Premium Mortgage Insurance (SPMI) – In this form of PMI, instead of doing monthly payments, you decide to pay the total PMI amount upfront thereby not increasing your monthly payments. This form of PMI would be suggested if you have funds available at closing of the home, and that way your monthly expense will remain lower. An advantage of this form of PMI is that it might help you qualify for a larger home loan because you paid the PMI upfront.
- Lender Paid Mortgage Insurance (LPMI) – Although this sounds great that the lender is footing the bill for the mortgage, it is a bit more complicated than that. The lender indeed does pay the PMI, but they also increase the interest rate on your loan in order to cover the PMI. Essentially you pay for the PMI by getting a higher interest rate on your home loan. The disadvantage of this type of PMI is that the interest rate does not reduce once you reach a loan-to-value (LTV) ratio of 78% because you’re locked into that interest rate.
- Split-Premium Mortgage Insurance – This is the least common type of PMI as it is a combination of monthly paid insurance (BPMI) and single premium insurance (SPMI). The way this type of PMI works is that you put a portion of the PMI upfront and pay the rest of the PMI as monthly payments part of the mortgage payments. This might be used by individuals who cannot pay the entire PMI upfront but can cover a portion in order to reduce their monthly costs. For example, on a $500,000 home, with a PMI rate of 1.5%, the total PMI amount is $7,500, if you decide to pay $3,000 upfront, the remaining amount of $4,500 is added to your monthly mortgage payment.
When can I stop paying PMI?
PMI for home loans can be removed if you satisfy at least one of the following:
- You achieve a loan-to-value (LTV) ratio 78% of the purchase price of the home – If you make enough payments such that your LTV is 78%, then PMI should automatically be removed by the insurer. You can also get PMI manually removed when you have 20% ownership in the house, you will have to reach out to your insurer to get it removed. In most cases, it takes homeowners 11 years to own enough equity in the home to get PMI removed. For example, on a $300,000 home price, if you have $234,000 outstanding in your mortgage, then you have achieved 78% LTV ($234,000/$300,000) and PMI should be removed.
- You pass the halfway point of your mortgage term - On a 30-year mortgage, for example, PMI must be removed 15 years into the loan. This is true even if the mortgage balance exceeds 78% of the original purchase price of the house.
- You refinance your mortgage - The last way to get rid of PMI is to refinance your mortgage and the new loan balance is less than 80% of the home’s current value. This will allow you to avoid paying PMI after the refinancing of the mortgage.
The Loan-to-Value (LTV) Ratio signifies the mortgage amount you are borrowing against the appraised value of the house. For example, if the appraised value of the house is $100,000 and the down payment is 10% or $10,000 ($100,000 * 10%) then the mortgage amount is $90,000 ($100,000 - $10,000), the LTV is $90,000/$100,000 which is 90%.
Why do I need to pay for PMI when it is for the lender’s benefit?
The reason for this is because the lender is taking on an additional risk by lending to you who is putting up less money upfront (<20% down payment) and can default on future payments.
However, it is important to understand that it is beneficial for you too because if PMI or insurance was not an option, lenders may not have offered a mortgage for anything less than 20% down payment, preventing a lot of individuals from becoming homeowners.
PMI also has an additional benefit because lenders can give you a better mortgage rate if you take PMI. The reason for this is because PMI allows lenders to recover a greater portion of their investment as compared to individuals who do not take PMI, allowing them to give you a better rate on your mortgage.
Is PMI Tax Deductible?
PMI is tax deductible! Just like other forms of mortgage insurance PMI can be deducted in your taxes. The Further Consolidated Appropriations Act of 2020, congress allowed for deductions till December 31st, 2020. It is also available for 2019 and 2018.