How Is PMI Determined?

If you bought your house with a Federal Housing Administration loan or put down less than 20 percent of the price, you're paying PMI. That's private mortgage insurance, a policy that you pay for but that protects your lender against loss if you default on the loan.

Loan-to-value Basis

PMI rates are based on loan-to-value, the percentage of the loan compared to the value of the house. They vary but usually are between .5 and 1 percent of the loan. PMI companies put these into standard tables, showing rates for various percentage loans on different terms. Let's say you have a $150,000 mortgage that is 95 percent of the house value. According to one standard PMI table, on a 30-year fixed rate mortgage, that would give you a PMI rate of .78 per thousand. Multiply the loan amount by the rate, .0078, to get the yearly price, $1,170, then divide by 12 for the monthly amount, $97.50.

Term Effect

Your PMI rate will be affected by the term of your loan. If your $150,000 loan is only for 20 years, for example, your rate drops to .26, according to the previously mentioned PMI rate table. That equates to a yearly cost of $390 or only $32.50 a month. Putting another 5 percent down, to reduce your loan-to-value ratio to 90 percent will cut your rate to .32 on a 30-year mortgage and .23 for 20 years. Rates are set by insurance companies but are generally standard.

High Risk

Those sample calculations are for buyers with good credit scores, 620 or above. The rates go up as your credit score goes down. A "high risk" borrower can pay up to 4 percent or more of the principal loan balance. On that $150,000 loan that could be $6,000 a year or $500 a month. Some lenders will waive such PMI rates if the borrower agrees to a higher interest rate. The benefit of that is that the interest is deductible on income taxes.

80 Percent Factor

PMI is discontinued on most loans when the loan-to-value ratio hits 80 percent. You can achieve that by paying your loan down or by getting your house reappraised at a higher value. Lenders are not required to automatically reduce or eliminate PMI and some FHA loans require it. You'll have to track it yourself and ask to have it stopped when you hit 80 percent.

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