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
How Do Lenders Calculate Private Mortgage Insurance

Hi Kate,

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!

Ask Kate at Get-Your-Best-Mortgage-Rate.com
Kate's Answer: How Do Lenders Calculate Private Mortgage Insurance

Hi Steve,

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.
See Private Mortgage Insurance Approvals and Denials for more Ask Kate solutions.
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.
See How Do Lenders Calculate PMI? for more Ask Kate solutions.

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.
See Who Determines the Cost of PMI to read about Kim who asks if her lender is ripping her off.

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.
Wait! There's even more! Discover a treasure trove of information at Paying Private Mortgage Insurance: Ask Kate Questions and Answers.
Best wishes,

Ask Kate

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Getting Rid of PMI
by: Paul from Houston, TX

We want to drop PMI on our mortgage of just over two years based partly on an appreciation in price, but we think the lender is stalling.

Our understanding of the law is that a lender MUST have a valuation done when the borrower requests it because the borrower is confident the LTV is under 78%.
Due to healthy appreciation we think we would meet that requirement. However, the lender is telling us that on loans between two and five years the LTV has to be 75%, which might not work. Is this 75% LTV condition legal (as opposed to 78%)?

If it matters, we live in Houston, TX. Due to a nice low 3.375% mortgage rate, we are not open to a refinance.

Many thanks in advance for your advice.

Hi Paul, Kate here...

I explain the requirements for getting rid of PMI, whether by cancellation or removal, at How Do I Cancel PMI.

You'll also want to read my answer to Pat, who feels she's getting the lender runaround, at Who Broke The Mortgage Loan To Value Calculator.

Thanks for writing.

Best wishes, Kate

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