How Is PMI Calculated

How Is PMI Calculated

How is PMI calculated? If you're planning to purchase a house and will be financing more than 80 percent of the cost of the property, taking the time to learn about private mortgage insurance premiums is important.

PMI Explained

Private mortgage insurance, commonly referred to as PMI, provides protection for the company that assumes the risk when underwriting a mortgage loan. While not all homebuyers are required to obtain a PMI policy, it is necessary in many situations. Mortgage lenders typically require homebuyers who make a down payment of less than 20 percent of purchase price of the home they are buying to obtain PMI.

As the borrower, you are required to pay the premium for this type of insurance even though the coverage is not designed to protect you. This is why it's important for you to know how PMI is calculated.

The cost of PMI will have an impact on the amount of cash due at closing as well as your monthly mortgage payment. Homebuyers are typically required to pay the first year's premium at closing. The annual premium for the next year will be divided into 12 payments and added on to your monthly house payment as an escrow item.

Understanding How Is PMI Calculated

Factors that Impact PMI Calculation

A number of factors can impact the exact manner that PMI is calculated. For example, the purchase price of the home and the loan-to-value percentage can have an impact on premium. This is because insurers may consider larger loans to carry higher risk than those that are for smaller amounts. Borrowers who are able to make a significant down payment may be considered to represent lower risks than those who do not do so. Additionally, loans classified as sub-prime mortgages and those that are considered jumbo loans typically have more expensive PMI rates than others.

Estimating Monthly PMI Payments

Generally speaking, you can estimate a range of PMI payments this way:

  • Upper Limit of Range: Divide the purchase price of the home by 1500. The result is likely to represent the highest amount you can expect to pay for PMI coverage each month.
  • Lower Limit of Range: Divide the purchase price of the home you want to purchase by 3700. The result is likely the minimum amount that PMI insurance could cost on a monthly basis.
  • Example Calculation: For a home that costs $150,000, the monthly PMI premium will likely cost between $40.54 and $100.

Once you have calculated the upper and lower limits, you will have a good estimate of how much you can expect your monthly PMI premiums to be. Of course, you will not know an exact cost until you go through the closing process, as the exact premiums will be set by the insurance company that underwrites the policy.

Using a PMI Calculator

How is PMI calculated? If you would rather avoid calculating PMI estimates yourself, there are a number of online calculators that you can use. As with hand calculations, it's important to note that the figures you get from a calculator tool are for estimating purposes only.

Online PMI calculators can be found on a number of websites, including:

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How Is PMI Calculated