How Much Does Private Mortgage Insurance (PMI) Cost?

How Is PMI Calculated?

Private mortgage insurance is an insurance policy that protects your lender if you stop making mortgage payments. Lenders typically require it when you put down less than 20% on a conventional loan.

To estimate your monthly PMI cost, multiply your loan amount by your PMI rate, then divide by 12.

Example: On a $300,000 loan with a PMI rate of 1%, you'd pay $3,000 per year, or $250 per month. ($300,000 x 1% = $3,000; $3,000 / 12 = $250)

Several factors determine your actual rate, including:

• Credit scores: The higher your credit scores, the lower your PMI rate. Borrowers with scores of 760 or above may pay as little as 0.46% annually, while those with scores in the 620 to 639 range may pay up to 1.50%, according to the Urban Institute.
• Down payment: A larger down payment reduces your LTV ratio, which signals less risk to the lender. The closer you are to 20% down, the less your PMI will cost.
• Loan type: Adjustable-rate mortgages (ARMs) typically carry higher PMI rates than fixed-rate loans because fluctuating payments create more risk for the lender.
• Loan amount: Larger loans generally mean higher PMI premiums in dollar terms, since the lender has more to lose.
• Debt-to-income ratio (DTI): A higher DTI can also push your PMI rate up.

The Real Cost of PMI

While PMI will increase the initial cost of your monthly payments, it could be a worthwhile tradeoff. You might be able to purchase a home sooner if you don't need to put 20% down. Or, you may be able to buy a larger or nicer home rather than making a large down payment.

While PMI sounds similar to mortgage insurance premiums (MIP) that you'll have on a Federal Housing Administration (FHA) loan, they are different. FHA loans come with a lower down payment and lower credit score requirements, but MIP is often required for the life of the loan. PMI, on the other hand, is only required until you reach a LTV ratio of 80%.

However, it's still important to understand how PMI will affect your monthly cash flow. Here's a look at how PMI compares to a MIP on an FHA loan:

Source: Urban Institute

The monthly figures are for a $400,000 home with a 3.5% down payment. Interest rates are 6.54% for the conventional loan and 6.34% for the FHA loan. The amounts don't account for some expenses, such as homeowners insurance or property taxes.

As you can see, FHA loans tend to offer lower initial monthly payments for most borrowers. However, if your credit score is 760 or above, a conventional loan with PMI may actually cost less per month.

Keep in mind that FHA loans require mortgage insurance for the life of the loan if you put less than 10% down, while PMI on a conventional loan can be canceled once you reach 20% equity. That makes the long-term cost picture different from the initial payment comparison above.

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How to Get Rid of PMI

You may need to pay PMI when you first buy your home, but there are also four ways to get rid of PMI:

• Automatic cancellation: By law, your mortgage servicer must automatically cancel PMI when your loan balance is scheduled to reach 78% of the home's original value, or when you're halfway through the repayment term, whichever comes first.
• Request cancellation: You may request cancellation once you reach 20% equity based on the home's original value. You may need to meet additional requirements, such as not having a second mortgage, and you may have to pay for an appraisal.
• Reappraise your home: The above two methods rely on the home's original purchase price. If your home has appreciated significantly or you've made home improvements that added value, you may be able to request PMI cancellation based on a new appraisal.
• Refinance your mortgage: If you have at least 20% equity based on a current appraisal, you may qualify for a new conventional loan without PMI.

Getting rid of PMI as soon as possible is worth pursuing. The insurance protects your lender, not you, so there's little reason to keep paying it longer than necessary.

Frequently Asked Questions

PMI Doesn't Have to Slow You Down

PMI can make homeownership possible sooner, even if you haven't saved a full 20% down payment. And the better your credit, the less you'll pay for it. As you prepare to buy a home, consider how much you can afford to put down and whether you can improve your credit before applying for a loan.

You can check your Experian credit report for free and get personalized recommendations for improving your score based on your unique credit profile.