Mortgage insurance protects the lender if you default on your loan, and it’s required in certain circumstances. The cost of private mortgage insurance (PMI) is based on the percentage of a home’s value loan amount and the borrowers’ credit. Regardless of the value of a home, most mortgage insurance premiums cost somewhere between 0.5% and as much as 5% of the original amount of a mortgage loan annually.
Credit scores don’t only affect mortgage interest rates and homeowners’ insurance rates. They also impact PMI rates. Your credit score is a significant determinant when it comes to the cost of mortgage insurance. It is one aspect of a formula used to determine your PMI costs.
In addition to credit scores, companies price PMI premiums based on the loan-to-value (LTV) ratio of a mortgage and what percent of the loan is recovered if, for some reason, a claim is filed. Most mortgages must be insured if they have a loan-to-value ratio (LTV ratio) of 80% to 97%. That means if a borrower can only make a down payment between 20% and 3% of the total value of a home, they will likely need to pay PMI.
Insurance companies also apply price adjustments to the base rates to increase and decrease the premiums’ cost. Some insurance companies’ adjustments cut the cost of premiums, such as those for mortgages with an amortization term of 25 or fewer years and corporate relocation loans. Other adjustments that may increase the cost of premiums are for situations in which the loan amount is more than $417,000 and for mortgages on second homes or investment properties. One common adjustment exception is for mortgage insurance premiums in the states of Hawaii and Alaska. Unlike the continental United States, adjustments to the cost of premiums based on loan amount begin at $625,000 instead of $417,000 in these states
If you’re looking for ways to avoid PMI on your first home purchase, there are various ways, such as working to increase your credit score or putting more money down when you purchase your home. You can also typically have the mortgage insurance removed when your LTV reaches 80%, but you must initiate it that process
Now that you know more about Private Mortgage Insurance, you probably still have some questions. If so, Primary Residential Mortgage is here for all of your home loan needs. We are happy to answer any questions you have. So, why not give us a call today and let us know how we can help.