If your down payment is less than 20 percent of the purchase price of your home, you’re subject to paying private mortgage insurance until your equity equals at least that 20 percent. If you take out an FHA mortgage, you’ll have to pay mortgage insurance for the life of the loan. In either case, the insurance protects the lender in case you default on your loan. The mortgage insurance is included in your monthly mortgage payment.
Mortgage Insurance Rates
Your PMI is usually between 0.3 percent and 1 percent of the entire loan, paid on an annual basis. If your loan is $200,000, you could pay as much as $2,000 per year in PMI. As of 2018, the Tax Cuts and Jobs Act eliminates the tax deduction for PMI. Your lender will inform you of your PMI rate, and you can generally find a table with applicable rates on your lender’s website. There are also plenty of online mortgage insurance calculators available.
PMI Calculation Formula
Calculating your PMI requires more than just figuring out the percentage of the loan involved and dividing it into 12 monthly installments. Your rate will also depend on your credit score, and you’ll pay less with a high score. You’ll also pay less each month if you have a 15-year loan rather than a 30-year loan and a fixed rate versus an adjustable rate.
The basic PMI calculation formula, however, is based on the loan to value ratio. That’s the amount of the loan compared to the value of the property. For example, if you purchase a house for $250,000 with a 10 percent, or $25,000, down payment, your loan to value ratio is 90 percent, or $225,000. If your PMI rate is 1 percent, divide it by $225,000 and you’ll come up with an annual PMI payment of $2,250. Dividing $2,250 by 12 gives you a monthly PMI payment of $187.50. Add that amount to your monthly principal and interest payment along with property taxes to come up with your overall monthly mortgage payment.
FHA Mortgage Insurance Calculation
If you have an FHA loan, your mortgage insurance calculation is different than a mortgage calculator with PMI. FHA mortgage insurance is generally 0.85 percent annually for the entire term of the loan. That’s the amount for homebuyers with a 30-year mortgage under $625,500, which is the overwhelming majority of FHA borrowers. However, because FHA borrowers need to pay just 3.5 percent of the purchase price as a down payment, they are also required to pay an upfront mortgage insurance premium of 1.75 percent of the dwelling’s base price at the time of closing. According to Fannie Mae mortgage insurance guidelines, an alternative to paying UFMIP at closing is having the lender pay the amount and then either increasing the borrower’s points or interest rate to cover the cost.
How to Eliminate PMI
PMI may have allowed you to purchase your house when you didn’t have a sufficient down payment, but it can prove to be a significant amount of your monthly mortgage bill. When you reach that 20 percent equity threshold or have an 80 percent loan to value ratio, you can’t automatically stop paying PMI. You must send the lender a letter, and the lender may require a home appraisal to ascertain that your equity is indeed 20 percent or more of the home’s value. Until all of the paperwork is complete, which may take months, you must still pay PMI. You must also check your mortgage agreement because some lenders include language requiring PMI for a certain amount of time whether or not you have sufficient equity to stop paying this fee.
- Investopedia: 6 Reasons to Avoid Private Mortgage Insurance
- U.S. Bank: FHA Loan Calculator
- U.S. Department of Housing and Urban Development: Mortgagee Letter 2017-07
- Bankrate: What is PMI? Learn the Basics of Private Mortgage Insurance
- FHAhandbook.com: Chart: FHA Annual Mortgage Insurance Premiums (MIP) for 2018
A graduate of New York University, Jane Meggitt's work has appeared in dozens of publications, including PocketSense, Zack's, Financial Advisor, nj.com, LegalZoom and The Nest.