how much is pmi

How Much is PMI: What You Need to Know

Are you considering purchasing a home with a down payment of less than 20%? 

Exploring PMI, or Private Mortgage Insurance, can be immensely beneficial in this scenario. PMI serves as an insurance policy for the lender, offering protection if you cannot make your monthly mortgage payments.


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What is PMI or Private Mortgage Insurance?

Private Mortgage Insurance (PMI) is a form of insurance that may be mandated when obtaining a conventional loan with a downpayment that is less than 20% of the purchase price.

PMI is designed to protect the lender, especially if you stop paying your loan. It is handled by the lender and provided by private insurance companies, insuring the lender against loss caused by borrowers failing to make loan payments. PMI is an extra monthly fee that conventional mortgage holders must pay lenders. 

Although the borrower pays for it, PMI protects the lender. It is important to note that PMI must be ended at a specific stage in your loan term or when your mortgage balance decreases to a certain percentage of your home’s value.

How Much is PMI Insurance?

The amount you pay in PMI depends on your loan, the down payment you made, and whether or not it’s a fixed- or adjustable-rate mortgage. Factors like your debt-to-income ratio and credit score also play a part.

Generally, a large downpayment and a very high credit score will result in lower PMI expenses. It’s also important to note that if you want to know how much mortgage insurance is, a quick intel is that for a conventional home loan, it typically ranges from 0.46% to 1.5% of the original loan amount. PMI can be a monthly fee, typically ranging from approximately $30 to $70 per month for every $100,000 borrowed. 

Additionally, the rate can range from 0.5% to 1.5% of the loan amount annually, depending on various factors such as the type of property and the down payment amount. As you pay off your loan, the PMI cost will decrease annually, and it is typically terminated once your mortgage balance drops to a certain percentage of your home’s worth!

What Are the Different Types of PMIs?

Now that we know how much PMI insurance is, let’s discuss the various plans you can explore that match your current situation.

Borrower-paid Mortgage (BPMI)

Borrower-paid mortgage insurance (BPMI) is a common type of private mortgage insurance (PMI) typically added to the regular monthly mortgage payment. It allows borrowers to spread the cost and add it to their monthly payments. BPMI can be canceled once the loan principal drops to 78% of the home’s value or when the borrower reaches 22% equity.

BPMI might be the right choice for a buyer who is unsure how long they will stay in the home or keep the mortgage. This form of PMI does not have an initial cost and can be canceled immediately through a refinance or a lump-sum payment towards the principal loan balance.

Federal Housing Administration (FHA)

FHA loans are intended to increase accessibility to homeownership. By insuring the loan, they are allowing lenders to offer better deals to borrowers. These loans are especially advantageous for individuals purchasing a home for the first time, as the down payment can be as low as 3.5% of the purchase price. They benefit first-time homebuyers and individuals with limited savings or credit challenges.

Single Premium Mortgage Insurance (SPMI)

This option enables homeowners to make a single lump-sum payment for the mortgage insurance premium at the closing of the mortgage. This method eliminates the need for a monthly PMI payment and can result in significant cost savings over the life of the loan. By paying the premium upfront, the homeowner can lower their monthly payment, reduce their debt-to-income ratio, and qualify for a larger loan. 

However, it’s important to note that if the homeowner refinances or sells the home within a few years, no portion of the single premium is refundable. Additionally, financing the single premium into the mortgage may result in paying interest on it for the duration of the loan. SPMI is particularly beneficial for homebuyers with good credit scores and a down payment of at least 5%.

Split-premium Mortgage Insurance (SPMI)

Split Premium Mortgage Insurance (SPMI) is a type of mortgage insurance that provides flexibility in managing the cost of mortgage insurance (MI). With SPMI, the MI cost can be split into a single upfront premium payment and a reduced monthly payment. The upfront portion can be covered differently by a third party, e.g., seller, builder, lender, or included in the borrower’s mortgage loan. At the same time, the remaining premium is incorporated into the homebuyer’s monthly mortgage.

This mortgage insurance offers flexibility by allowing a single upfront premium payment and lower monthly payments, making it valuable for borrowers with specific financial considerations.

Let’s Calculate Your PMI

To really know how much mortgage insurance is or how much the PMI you’ll pay, you can use the following steps:

To calculate the cost of PMI, you can use the PMI rate to determine the annual premium and then divide this amount by 12 to find the monthly payment.

Determine the PMI Rate: The average cost of PMI for a conventional home loan ranges from 0.46% to 1.50% of the original loan amount per year. The amount varies based on credit score, with borrowers with lower credit scores paying more for PMI than those with higher credit scores.

Calculate the Annual PMI Premium: Multiply the loan amount by the PMI rate to calculate the annual PMI premium.

Determine the Monthly PMI Payment: To determine the monthly payment amount, divide the annual payment by 12.

Consider Loan-to-Value Ratio (LTV): Calculate the LTV by dividing the loan amount by the property value. PMI may not be required if the LTV is 80% or lower.

Use a PMI Calculator: Utilize a PMI calculator. It will estimate the potential cost of private mortgage insurance for a conventional loan with a down payment of less than 20%. This is the best option if you need help following what’s noted. 

PMI Hacks to Know

These are not technically ‘hacks,’ but creating more effective ways to avoid getting PMI. Eliminating it as early as possible helps you gain peace of mind and free up cash flow. 

  1. Secure a 20% downpayment or increase your down payment. It’ll reduce the lender’s risk and the need for PMI.
  2. Use a second mortgage or piggyback loan. To bypass PMI, seek to secure a primary mortgage equivalent to 80% of the home value, then acquire a secondary mortgage for the remainder of the home’s sale price minus the down payment and the initial mortgage amount.
  3. Research Government-Backed Loans, such as VA and USDA Rural Development Loans. They are available with minimal down payments and do not require PMI or other ongoing insurance payments.
  4. Explore specialized programs that offer low down payment mortgages with no PMI.

I’m Already Paying PMI; How Can I Remove It ASAP?

PMI can be eliminated by achieving 20% to 22% home equity, confirming with your lender, refinancing, proactively requesting cancellation, monitoring your loan-to-value ratio, and exploring government-backed loans.

By understanding these options and taking proactive steps, homeowners can work towards getting rid of PMI payments and reducing their mortgage expenses.

In all of this, Private Mortgage Insurance (PMI) is a risk management tool for lenders, allowing them to accept smaller down payments from borrowers. 

PMI allows anyone interested to access the housing market with a lower initial financial outlay. However, borrowers must understand that PMI is an additional ongoing expense that does not protect them in the event of payment default. By being aware of PMI’s requirements and potential termination points, borrowers can make informed decisions about their mortgage financing and work towards eliminating this extra cost as their home equity grows.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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