The cost of private mortgage insurance (pmi) is based on the amount of the loan, the creditworthiness of the borrowers, and the percentage of the home’s value that would be paid on a claim. In general, all companies that sell mortgage insurance price their policies this way. Regardless of a home’s value, most mortgage insurance premiums cost between 0.5% and 5% of the original amount of a home loan per year. That means if $150,000 was borrowed and annual premiums are 1%, the borrower would have to pay $1,500 each year ($125 per month) to secure their mortgage.
how credit scores affect the cost of pmi
Credit scores not only affect home and mortgage insurance rates, they also affect PMIS. Here’s an example of how factors like creditworthiness impact the cost of mortgage insurance: Consider two people who want to buy a home valued at $100,000 and can each put up $10,000 or 10% of the home’s value. Even though they can afford the same down payment, your credit scores are important determinants when it comes to the cost of your mortgage insurance policies. To show this, we graphed the price difference between credit score silos for a mortgage insurance policy offered by Radian. The policy is for a borrower-paid mortgage insurance policy that covers a fixed-rate loan with a term of more than 20 years. You can see that if Borrower A has a FICO credit score of 760 or higher and Borrower B has a score below 639, Borrower B’s mortgage insurance premiums would cost 4 times that of Borrower A.
how loan-to-value (ltv) and claims payment affect pmi costs
In addition to FICO credit scores, companies value PMI premiums based on a mortgage’s loan-to-value (LTV) ratio and what percentage of the loan is recovered if a claim is filed. It may sound complicated, but calculating these factors for a policy is easy.
Most mortgages must be insured if they have a loan-to-value ratio (LTV ratio) of 80% to 97%. In other words, if a borrower can only put down between 20% and 3% of a home’s value, he or she probably needs a mortgage insurance policy. but not all ltv relationships are treated the same. In the following table of a mortgage insurance policy offered by the Genoworth Mortgage Insurance Corporation, the difference between the LTV ratio and the cost of the policy are clear. Rates are for the annual premiums paid by the borrower for non-fixed rate mortgages and are based on LTV indices, the coverages offered within each index, and the cost of premiums for each PMI policy given the risk group (the score borrower’s trust).
annual premiums are the percentages of the original mortgage loan amount in each fico score column. For example, suppose a homeowner with a FICO credit score greater than 760 borrowed $100,000 that was equal to 92% of the value of the home he purchased. If your mortgage lender purchased a policy to cover 35% of the $100,000 loan amount, the borrower’s PMI premium would be 2.56% of that amount or $2,560.
pmi rate adjustments
Insurance companies also apply price adjustments to the above base rates. Genworth Mortgage Insurance Corporation, for example, offers mortgage insurance and applies several common adjustments that raise and lower the cost of premiums. Some of the company’s adjustments reduced the cost of premiums, such as mortgages with a repayment term of 25 years or less and corporate relocation loans. Other adjustments that increase the cost of premiums are for situations where any loan amount is greater than $417,000 and for mortgages on second homes and investment properties.
Below is an example of the five adjustments that have the greatest impact on the base rate of a mortgage insurance policy. Like Genworth, Radian also has adjustments that lower the cost of the borrower’s premium, however these are not included in the chart.
There may be exceptions within the adjustments carriers apply to premiums. A common adjustment exception is for mortgage insurance premiums in Hawaii and Alaska. Unlike the continental United States, premium cost adjustments based on loan amount start at $625,000 instead of $417,000 in Alaska and Hawaii.
If you’re looking for ways to avoid pmi on your first home purchase, there are a variety of methods, but keep in mind that many of these may cost you more in the long run.