How Much is Private Mortgage Insurance on a Conventional Loan?
Buying
a home is a major financial decision, and different loan options are
available to help make it happen. One of the most common loan types
is the conventional loan, which requires private mortgage insurance
(PMI). Understanding how much PMI you may be paying on a
conventional loan can help you to budget your finances effectively
and plan for your future.
This article will examine how much private mortgage insurance costs
on a conventional loan. We will explore the various factors that can
influence how much you may pay for private mortgage insurance and
how you can reduce the cost. We'll also discuss when you may be
exempt from paying for it. Finally, we'll examine some benefits of
opting for private mortgage insurance and how it can help you secure
a loan.
This article will examine how much private mortgage insurance costs on a conventional loan. We will explore the various factors that can influence how much you may pay for private mortgage insurance and how you can reduce the cost. We'll also discuss when you may be exempt from paying for it. Finally, we'll examine some benefits of opting for private mortgage insurance and how it can help you secure a loan.
What is Mortgage Insurance, and How Does it Work?
Lenders
frequently require mortgage insurance from borrowers who put down
less than 20% of the purchase price when buying a home. If the
borrower defaults on the loan, this insurance protects the lender.
Borrowers typically pay mortgage insurance premiums in addition to
their monthly mortgage payments. Private mortgage insurance (PMI)
and government-backed insurance, such as the Federal Housing
Administration's (FHA) mortgage insurance premium, are the two types
of mortgage insurance (MIP).
While government-backed insurance is required for government-backed
loans like FHA and VA, the borrower typically purchases PMI, which
is typically required for conventional loans.
When it comes to obtaining a mortgage, several factors come into
play that can affect the interest rate and terms of the loan. One
such factor is the borrower's credit score. Individuals with a
higher credit score are deemed less risky borrowers than those with
a lower score. As a result, higher credit scores often translate to
lower interest rates and sometimes even the ability to avoid paying
Private Mortgage Insurance (PMI).
However, for those borrowers who require PMI, the cost can vary depending on several other factors, such as the amount of the down payment, loan-to-value ratio, and credit score. When borrowers put a smaller down payment or have a higher loan-to-value ratio, they may be charged higher PMI premiums as they risk defaulting on the loan.
It is essential to note that PMI costs can add up over time and can add a substantial amount to the overall cost of the mortgage. Luckily, once borrowers have paid off enough of their mortgage or if the value of their home has risen, they might be able to cancel their PMI. This can result in significant savings and a lower monthly mortgage payment.
Mortgage insurance is an important consideration when applying for a mortgage. Having a higher credit score can lead to lower PMI premiums, but other factors, such as down payment and loan-to-value ratio, can also affect the cost of PMI. By understanding these factors, borrowers can make more informed decisions about their mortgage and potentially save money in the long run.
Types of Mortgage Insurance and Their Costs
There are four different PMI plans available to home buyers and home homeowners.
Borrower-paid monthly mortgage insurance (BPMI) is often required for borrowers with down payments of less than 20% of the home's purchase price.
The borrower must include a premium payment in this kind of plan as part of their monthly mortgage payment—the only choice most lenders provide for conventional loans and the most prevalent type of mortgage insurance.
The premium is added to the borrower's monthly mortgage payment and is figured as a percentage of the loan amount. The amount of compensation depends on several factors, including the down payment size, the loan-to-value ratio, and the borrower's credit score.
Because the premium is spread out throughout the loan rather than being paid all at once upfront, BPMI plans may be more straightforward for borrowers to budget and manage. However, since the monthly premium is paid for the loan duration, BPMI plans may cost more in the long term.
In contrast to single premium plans, the BPMI plan is more often provided by lenders, more generally accessible, and available for various loan types, including those backed by the government, like FHA and VA loans. Before choosing the appropriate kind of mortgage insurance, borrowers should consider the advantages and disadvantages of each type of plan and talk with a lender about their alternatives.
- Borrower-paid mortgage insurance (monthly)
- Single-premium mortgage insurance
- Split-premium mortgage insurance
- Lender-paid mortgage insurance
How is PMI Calculated?
When taking out a mortgage, you may need to pay for PMI or mortgage insurance, a separate fee added to your regular mortgage payment. The cost of mortgage insurance may vary based on factors such as the loan amount, credit score, and down payment.
Typically, the PMI rate is calculated based on the loan-to-value ratio (LTV) of the mortgage loan, which is the mortgage amount divided by the property's appraised value. Lenders and mortgage insurance companies usually provide a PMI rate chart displaying the percentage you must pay each year. To determine how much it costs, multiply the percentage by the mortgage loan amount to find the annual cost divided into monthly payments and added to your mortgage payment.
Here's an example of the monthly version of PMI:
Loan amount X premium factor = annual cost/12 (months). That's how lenders calculate the monthly PMI cost.
You may get a sense of the PMI cost by looking at the PMI variables below the PMI plan.
1. Borrower-paid Private Mortgage Insurance (Monthly)
Without question, the most popular payment plan is the monthly mortgage insurance option. Probably because it's the easiest for the loan officer. The PMI premium is billed annually, and the lender collects 1/12 of the annual premium and includes the cost with the mortgage payment.
Down Payment | 760+ | to | 620-639 |
---|---|---|---|
3% | 0.58% | 1.86% | |
5% - 9.9% | 0.38% | 1.42% | |
10% - 14% | 0.28% | 0.94 | |
15% - 19.9% | 0.19% | 0.44% |
2. Single-premium Private Mortgage Insurance
Single-premium PMI can be a great option for those who want to reduce their monthly mortgage payments or save money over the life of the loan.
It can also be used in conjunction with seller-paid assistance for those who are buying a home. However, weighing this option's pros and cons before deciding is important. Sometimes, it may not be the best choice, especially if you plan to refinance or sell your home before reaching 20% equity.
Down Payment | 760+ | to | 620-639 |
---|---|---|---|
3% | 1.58% | 5.96% | |
5% - 9.9% | 1.22% | 4.72% | |
10% - 14% | 0.87 | 3.20 | |
15% - 19.9% | 0.47 | 0.127 |
3. Split-premium Private Mortgage Insurance
One option for paying PMI is to split the payments into monthly installments, which is commonly done. However, there is also an option called single-premium PMI, which combines the full insurance cost into a single payment. Instead of making regular mortgage insurance payments, you can either pay the full amount at closing or roll the amount into the loan for a higher loan balance, depending on the loan terms.
The split-premium mortgage insurance blends the monthly mortgage insurance premium with the single-premium mortgage insurance. There is an upfront payment at closing and a reduced monthly payment.
The split premium offers upfront premiums that range from 0.50% upfront to 1.75%. The following chart assumes an upfront premium of .50%.
Down Payment | 760+ | to | 620-639 |
---|---|---|---|
3% | 46.00% | 2.16% | |
5% - 9.9% | 30.00% | 1.50% | |
10% - 14% | 0.1700 | 0.9700 | |
15% - 19.9% | N/A | N/A |
4. Lender-paid Private Mortgage Insurance
Lender-paid mortgages are a way to avoid the cost of private mortgage insurance. With lender-paid private mortgage insurance (LPMI), the lender pays for the insurance policy on behalf of the borrower.
Instead of a separate monthly premium, the borrower pays a slightly higher interest rate. While LPMI can save borrowers money in the short term, it's important to consider the long-term costs of a higher interest rate and potential tax implications.
Down Payment | 760+ | to | 620-639 |
---|---|---|---|
3% | 2.30% | 10.00% | |
5% - 9.9% | 1.89% | 7.75% | |
10% - 14% | 1.43 | 5.87 | |
15% - 19.9% | 0.71 | 2.19 |
When Does Private Mortgage Insurance End?
If
you want to cancel your mortgage insurance, it's important to
understand how much you're paying for private mortgage insurance
(PMI) and the process to request to stop paying it. PMI is typically
required when you have less than 20% equity in your home, and it can
add up to a significant amount over time.
The good news is that there are ways to get rid of PMI and stop paying for it. You can request a cancellation once you reach 20% equity in your home or wait until the PMI automatically ends once you have reached 22% equity based on the original purchase price. It's important to note that for FHA loans, PMI is required for the entire life of the loan, so getting rid of PMI may not be an option.
The
federal Homeowners Protection Act (HPA) allows for the
elimination of Private Mortgage Insurance (PMI).
Generally, the law offers two methods for removing PMI
from a house loan:
- seeking PMI cancellation; or
- terminating PMI automatically or permanently.
Request cancellation of PMI
If the outstanding balance of your mortgage is less
than 80% of the home's original value, you have the
right to request that your servicer cancel the private
mortgage insurance. This cancellation date should have
been disclosed to you in writing during the mortgage
application, with the PMI disclosure form. Contact your
service provider if you can't find the disclosure form.
You may be eligible for PMI cancellation sooner, if you
have made additional payments that reduce the principal
balance of your mortgage to 80 percent of the home's
original value.
The term "original value" refers to the lesser of the
contract sales price or the appraised value of the
property at the time of purchase (or, if you have
refinanced, the appraised value at the time you
refinanced).
Additional conditions must be satisfied if you want to
eliminate the PMI on your loan:
- If the value of your property has fallen below the initial purchase price, you may be unable to cancel PMI at this time.
- You must have a positive payment history and maintain current payments.
- You must submit your request in writing.
- Your lender may ask you to produce proof (such as an appraisal) that the value of your property has not decreased below the home's original worth.
- Your lender may ask you to confirm that there are no junior liens on your property (such as a second mortgage).
Termination of PMI automatically
Even if you do not request
that your servicer discontinue PMI, your servicer is
required to do so automatically when your principal
amount reaches 78 percent of the home's original value.
To ensure that your PMI is terminated on that date, you
must be current on your payments at the time of the
expected termination. Otherwise, PMI will remain in
effect until your payments are brought current.
SOURCE: Consumer Financial Protection Bureau
Conclusion
In conclusion, conventional loans require PMI when the down payment is less than 20%. This protects the lender in case of default. Borrowers can avoid PMI by making a down payment of 20% or more.
SOURCE:
Termination of Conventional Mortgage Insurance
Mortgage Insurance Coverage Requirements
Recommended Reading
Do conventional loans require private mortgage insurance?
When does private mortgage insurance go away?
How Much is Private Mortgage Insurance on a Conventional Loan