Low down-payment mortgages help cash-strapped borrowers get into a home. Rather than put all of your reserves toward the purchase, you can save on the down payment, paying as little as 3 percent for a conventional home loan. However, a low down payment requires private mortgage insurance to cover the lender if you default. Calculating the PMI in advance can help you decide whether to get a low down payment loan, pay off the PMI in lump-sum or hold off until you've saved 20 percent for a down payment. You can find estimated PMI rates using a consumer-friendly online calculator provided by PMI companies and mortgage lenders.
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Your Lender Provides Your PMI Rate
The PMI rate is a percentage of the original loan amount on a yearly basis. Its price varies by lender, loan, location and PMI provider. The size of your down payment affects your rate, with larger down payments leading to lower rates. Your credit score and the intended use for the property also impacts PMI rates, with owner-occupied homes having lower rates than investment properties. Taking these various factors into consideration, your lender ultimately determines how much PMI coverage you need and the rate.
Figure Out the Conventional Loan Amount
PMI rates generally range between .3 percent and 1.15 percent. Therefore, on a typical conventional loan, it can cost from $50 to more than $100 per month. Say you want to purchase a $200,000 house with a fixed-rate loan and a 10 percent down payment. You have a 700 credit score and your lender tells you the PMI rate is .5 percent for your specific loan scenario. You can begin to calculate the PMI cost by determining the loan amount. First, subtract the down payment amount from the home price: $200,000 - ($200,000 x .1) = $180,000.
Apply the Estimated PMI Rate
Apply the PMI rate of .5 percent, as a decimal figure, to the loan amount by multiplying: $180,000 x .005 = $900. The annual PMI premium is $900, which you can pay in 12 monthly installments with each mortgage payment. To get the monthly figure, divide the premium by: $900/12 = $75. Your initial monthly PMI payments are $75.
Lower Your PMI Rate
Your loan's risk level decreases over the years as you pay down the original loan amount. Therefore, you might pay a higher initial PMI rate for the first 10 years and a lower rate in year 11 and thereafter. Federal law requires lenders to automatically cancel PMI when your loan is scheduled to reach 78 percent of the original loan amount. With your lender's cooperation, you may even be able to show that your home has appreciated in value substantially enough to eliminate PMI earlier. This requires a home appraisal. Also, your conventional lender may allow you to pay a lump-sum at closing to eliminate monthly PMI payments, known as lender-paid PMI, or LPMI.
