Questioning Private Mortgage Insurance Calculations
by Steve from Boston, MA and by Paul from Houston, TX
Ask Kate if you're questioning your lender's private mortgage insurance calculations: Steve wants to know how banks calculate mortgage insurance (also known as MI) for conventional home loans. Is there an actual calculation or did his lender just make up an amount? Paul wants to drop PMI based on his home's increasing value but suspects that the lender is stalling.
Ask Kate: How Do Lenders Calculate Private Mortgage Insurance By Steve from Boston, MA
Just came across your website, very cool. I wish I had contacted you earlier.
I am buying a condo and about to close. I'm putting down 5% and financing $321,000 over 30 year fixed rate of 4.125%.
My lender says that I need to pay $238 each month for PMI. (Originally it was $283.) It seems VERY high to me so I just asked him if there was a way to build the PMI into my interest rate.
For example, instead of 4.125%, I'd prefer paying 4.375% and eliminate PMI altogether.
My question to you is how much should I be paying for PMI? Is there an actual calculation or did my lender make up the amount? Am I allowed to build the mortgage insurance into my rate? Is built-in PMI tax deductible? Or could I pay it upfront? How is that calculated?
I'm curious to see what you have to say. Thanks again!
Kate's Answer: How Do Lenders Calculate Private Mortgage Insurance
Borrowers are often wary of asking their lenders such probing questions. Thank you for bringing up the subject of PMI calculations for conventional loans!
Steve's Question: How much should I be paying for PMI? Kate's Answer:
The cost of mortgage insurance is based on many factors, for example, credit scores. The higher the credit scores, the less expensive the MI. Conversely, the lower the credit scores, the higher the premium.
Another factor is the percentage of down payments. Minimal down payments (or equity if refinancing) require more MI coverage.
Additionally, the stability of the loan program can affect the MI premium. For example, adjustable rates require more coverage than 30 year fixed rates. Another factor, as well, is the length of the mortgage, for example, 40 year terms require higher MI than 15 year terms. Likewise, the owner occupancy status affects the price of the MI as does the purpose of the mortgage, for example, a home purchase vs a refinance.
Steve's Question: Is there an actual calculation or did my lender make up the amount? Kate's Answer:
There are precise calculations, to the penny, given to the lenders by private mortgage insurance companies, based on your credit qualifications and loan parameters. Go to Mortgage Insurance Cost: Is Your Bank Overcharging You
where Chelsey asks if her lender's charge of $4100 for MI is excessive.
Steve's Question: Can I pay PMI upfront or build it into my interest rate? Kate's Answer:
There are two main methods of paying conventional MI, borrower paid mortgage insurance and lender paid mortgage insurance.Borrower Paid Mortgage Insurance:
The most common way to pay MI is as a separate entry within your monthly mortgage payment. Think of this form of MI as pay-as-you-go. However, sometimes it can be paid upfront in closing costs, as in one lump sum. This can be a good option for borrowers who are certain that they will be keeping their mortgage long-term. Lender Paid Mortgage Insurance:
In spite of how it sounds, lender paid mortgage insurance is also paid by borrowers. (No free lunches!) But instead of a charge in the monthly house payment or a lump sum paid upfront, the cost is calculated into a higher interest rate.
Again, there is no guess work about the calculations. Lenders form contracts with private mortgage insurance companies and apply those rates according to individual borrower qualifications and loan parameters.
Steve's Question: Is built-in PMI tax deductible? Kate's Answer:
Ah, yes, the million dollar question with answers that can change at the whim of Washington DC!
Shelly asked a similar question. You'll find my answer at Lender Paid Mortgage Insurance for HARP Refinance
Regarding borrower paid mortgage insurance, you'll find my answers at What Is PMI and American Taxpayer Relief Act
. But keep in mind that tax laws change and your CPA is the best source of accurate and up-to-date tax information.
Contact the Private Mortgage Insurance Company
If you do not trust that you are getting reliable MI calculations, ask your lender for the name of the company that is providing your coverage. (If your loan originator doesn't know, ask him or her to find out.) Then look up the specific company online.
Many MI companies publish their calculations publicly. But if you find their charts are confusing, you can also call them. Just look for contact information on their website.
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