PMI stands for Private Mortgage Insurance. This type of insurance protects the lender against any defaults made by the borrower in returning the loan. Because of the fact that the borrowers have little to lose if they back out from the loan, the lender will face any loss.
The low down payment of loans requires the borrower to get a PMI. For example, the loans with LTV (loan-to-value) percentages pertaining to their amount, above 80% will require a PMI. The PMI needs to be paid monthly by the creditor till a certain amount of equity on their property is achieved, by which the creditor finds the loan to be of low risk.
How to determine PMI cost and rate of interest?
The following is a chart that can be used to determine the PMI payments depending on the LTV.
80.01 – 85% 0.375
85.01 – 90% 0.47%
90.01 – 95% 0.78%
95.01 – 97% 1.04%
Therefore, from the above chart we can determine that the higher the LTV, the more the PMI interest rate and the risk for the lender will be more. These charts can be found on the lender’s website or can be asked for in person, before applying for the loan.
To determine the PMI you can refer to the above-mentioned chart. The PMI rates and the rates of interests vary significantly through the years and new policies that come up, in addition to what your credit score is. It can range from 0.3% per annum to 1.5% of the principal loan amount.
For example, if you plan to buy a house of $200,000 and make a down payment of 10% (that is $20,000), your loan amount will be $180,000. Depending on your credit score, you opt for an insurance that has a 0.47% interest rate per annum. 90% LTV (10% down) will cost you 0.47% of interest rate. So, you will have to pay $846 every year, or $70.5 every month.
A little more about PMI
- The shorter the loan tenure, the smaller the interest rate will be. Adjustable loans may cost you more than fixed-rate loans. This is how tenure affects your PMI.
- You need not pay PMI once your LTV reaches 80% of the loan amount or you acquire 20% equity on your home.
- You should also note that the lender will need to be reminded about the cancellation of PMI. So, keep a pen and paper ready to write to them about it.
Image credit: blog.bhhssnyder.com