When determining what your monthly mortgage payment will be, lenders use the acronym, PITI, to describe the elements of your monthly payment. PITI stands for principal, interest, taxes and insurance. The insurance portion stands for two different types of insurance, homeowner’s or hazard insurance and private mortgage insurance (PMI).
PMI protects lenders in the case that borrowers default on their mortgage and also benefits homebuyers, as it allows buyers to purchase a home with a low down payment.
Not all homebuyers are required to pay PMI. Typically with a conventional loan, if your down payment is less than 20 percent of the value of the home, lenders will require that you carry PMI until your loan-to-value (LTV) ratio is less than 80 percent. The LTV ratio is determined by dividing the amount of money you have borrowed by the value of the property you purchased.
For example, if you are purchasing a $200,000 home and put down 10 percent, or $20,000, your LTV would be $180,000 divided by $200,000. Your LTV would amount to 90 percent.
So if you are putting down less than 20 percent, what is PMI going to cost you? If you’re going the route of a conventional mortgage, insurance rates will vary based on your down payment and credit score. The lower your down payment and credit score, the higher the PMI premiums. Typically costs can tend to range from $30-$70 per month for every $100,000 borrowed.
Private mortgage insurance rates tend not to vary as much based on credit score or down payment when a borrower is financing with a government loan. Government loan PMI characteristics include:
- FHA. These loans have an up-front mortgage insurance premium, as well as annual premiums, which are collected monthly.
- VA. One of the biggest benefits that come with a VA loan is that there is no PMI required.
- USDA Rural Development. RD loans boast lower PMI rates than conventional and FHA loans.
If you would like to know more about what your PMI scenario might look like then feel free to contact one of our experienced Loan Officers to get you all the information you need.
Looking for more information on buying a home? Our Mortgage 101 Handbook is the ultimate guide for first time homebuyers.
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