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PMI Calculator is a tool for homebuyers and homeowners to calculate the monthly costs for private mortgage insurance or PMI. Homebuyers are required to pay for PMI on conventional mortgages when their down payments are lower than 20%.
Private Mortgage Insurance Calculator |
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Private mortgage insurance or PMI is insurance that homebuyers pay for conventional mortgages when their down payment is less than 20%. The homebuyers will keep paying PMI until they have at least 20% equity in their home.
PMI is used to protect the lender, not the homebuyer when the borrower defaults or stops making mortgage payments. Borrowers with a down payment lower than 20% are viewed as riskier to the lender. They are more likely to walk away from mortgage payments during financial difficulties or when the home loses value and they owe more on their mortgage than their houses are worth. Homeowners who have a larger down payment or more equity in their house are less likely to walk away from payments. Therefore, to justify the additional risks, conventional lenders require borrowers with a down payment of less than 20% to pay for PMI to cover their losses in case they default.
The cost of PMI for a conventional mortgage ranges from 0.22% to 2.25% of the mortgage amount according to Chase Bank. The larger the mortgage amount, the more you will pay for PMI. The higher your credit score, the lower your PMI percentage rate.
PMI is calculated based on the homebuyer's down payment, debt-to-income ratio (LTV), credit score, and mortgage size. The larger the down payment, the less you pay on PMI because you will build up 20% home equity faster. The better your credit score and the lower your LTV may also lower the PMI rate. Let's say your PMI is 1% on a mortgage of $500,000. Annual PMI = 1% of $500,000 = $5,000 Monthly PMI = $5000/12 = $416.67 You can check how much you will need to spend on PMI, and when you can pay it off with our PMI payoff calculator.
VA home loans do not have any requirements for PMI. Qualified homebuyers are not required to make a down payment and pay $0 for PMI, but they need to pay a one-time funding fee.
You can lower your PMI costs if you make extra principal payments on top of your monthly payments. With the additional payment, you build up your home equity faster. When the loan-to-value ratio or LTV reaches 80%, you can stop paying for PMI and hence lower your overall PMI costs. Another way to lower PMI is to improve your credit score dramatically before applying for a mortgage which would reduce your PMI rate.
Not all lenders require PMI. Some lenders will waive the PMI but charge a higher interest rate. Borrowers should do the math and see which approach costs less. If you qualify for government-backed mortgages, you may pay less for PMI or none at all with a VA home loan.
Homeowners will stop making PMI payments when they have at least 20% equity in their homes. The PMI payment should stop automatically. If it doesn't, you should contact your lender and have them remove the PMI payment.
In general, you will pay a monthly premium for PMI which is added to your monthly mortgage payments. Some lenders, however, may require you to pay for PMI upfront at closing. It depends on the lender and the structure of their PMI payment.
There are a few ways to avoid paying for PMI.
Make a 20% down payment on the house you want to buy. If you can't afford a 20% down payment, save more money before you buy a house.
With a smaller or cheaper house, you may be able to put up a 20% down payment. Even if you still can't, you will save money on PMI because you will only need a smaller mortgage amount.
Some lenders are willing to remove PMI in exchange for a higher interest rate. However, you will need to do the calculations carefully as it may or may not reduce your overall costs. You could end up removing PMI but paying more on interest payments. Remember, your PMI will be removed after you have 20% equity, but your interest rate and payments stay the same throughout the term on a fixed-interest mortgage.
Make extra principal payments every month in addition to your regular monthly mortgage payments. With extra payments, you can build your home equity faster and stop PMI payments earlier. Although you still need to pay for PMI, it may be a much lower amount depending on how much extra you pay.
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