When you’re buying a home or thinking of buying one, you’ll need to factor in many costs other than the home loan. If you’re not making a 20 percent down payment, and most people don’t, private mortgage insurance, or PMI, is at the top of the list of costs to consider.
The biggest question for homebuyers is, “How much does PMI cost?”
The answer is different for every buyer, but here’s a quick guide to break down the basics.
What Determines PMI Costs?
Several factors are used to calculate PMI on conventional mortgage loans. They include:
Loan amount and down payment
The loan amount and down payment matter because they affect your loan-to-value ratio or LTV. This ratio represents the amount of the loan versus the value of the home.
If you’re buying a $250,000 home with 10 percent ($25,000) down, your LTV ratio is 90 percent. With conventional loans, PMI may be required if your LTV ratio is higher than 80 percent.
Your loan term determines your mortgage amortization, which is the monthly payment amount of principal and interest over the life of the loan. A longer loan term typically means a slightly higher PMI rate. Loan terms under 20 years are typically eligible for slightly lower PMI rates.
Mortgage insurance rate
This is the rate you pay for PMI insurance and it’s set by the private mortgage insurance company your lender chooses.
Percent of loan covered
PMI only insures your lender for part of your loan, not the full amount. Depending on the PMI provider and the down payment, insurance coverage could range from 6 to 35 percent.
How Your Credit Score Affects Your PMI
Your credit score matters when it comes to qualifying for a mortgage and it’s also important for calculating PMI costs.
Mortgage lenders use credit scores to gauge risk. The following tables give examples of how monthly PMI costs can vary when your credit score is factored in:
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Bottom line? The better your credit score and the more money you put down, the lower your PMI premiums will be.
Minimize PMI Costs
Putting down 20 percent or more on a home purchase lets you sidestep PMI altogether, but that might not be realistic for your budget. You could, however, work on improving your credit score before you buy, which can cut down on what you pay for PMI.
Two simple ways to do that include:
- Paying bills on time
- Keeping credit card balances low
If you’ve already bought a home and you’re paying PMI on a conventional loan, there’s good news. You can ask your lender to cancel your PMI at some point.
Then get prequalified to find out how much of a loan you might be approved for so that you can think about your down payment and PMI strategy.
*The sample PMI rates from the tables above are sourced from https://mi.archcapgroup.com/Portals/1/Documents/rates/060418/MCUS-B0283-EZ-MonthlyRateCard.pdf.
Capital Bank, N.A. is not a debt management, tax planning, financial planning or credit counseling service provider. The information provided is strictly for informational purposes and not meant as legal or financial advice. Please seek professional advice from an accountant, financial advisor or credit counselor.