Cost of PMI (Private Mortgage Insurance)
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What Does PMI Cost?
If you borrow more than 80% of your home's fair market value (FMV), your lender may require private mortgage insurance (PMI). For this coverage, you will pay a monthly premium at a cost that depends on how much over 80% FMV you borrow as this is the amount the PMI company is insuring. The monthly premium varies somewhat by lender but the following schedule should give you a good idea of what it will cost.
- Borrow 95% of FMV: approximately 0.78% (of the beginning mortgage amount) divided by 12
- Borrow 90% of FMV: approximately 0.52% (of the beginning mortgage amount) divided by 12
- Borrow 85% of FMV: approximately 0.32% (of the beginning mortgage amount) divided by 12
You obviously want to eliminate this extra cost as soon as possible. Here is the potential monthly and annual expense based on a home worth $200,000:
- 95% loan-to-value (LTV): $190,000 @ 0.78% = $1,482.00 per year and $123.50 per month.
- 90% loan-to-value (LTV): $180,000 @ 0.52% = $ 936.00 per year and $ 78.00 per month.
- 85% loan-to-value (LTV): $170,000 @ 0.32% = $ 544.00 per year and $ 45.33 per month.
As soon as your mortgage loan balance, when compared to the value of your home, drops below 80%, you can ask your lender and PMI company to eliminate this insurance coverage. There are two ways to reach this goal. First, you could continue making payments until your outstanding mortgage balance equals less than 80% of the value of your home when you closed the loan. Be advised that this will take some time to work out for you since all mortgage loans are heavily “front loaded” (most of your monthly payment will go to interest for some years) because of the loan size and long-term repayment period. Often a better solution, particularly in a time when home values are rising consistently, is to have your property re-appraised to determine its current fair market value. If it has risen enough to result in your mortgage loan balance being less than 80% if your home's FMV, you can ask the lender to terminate the coverage immediately. Even if you had to spend $250 for the new appraisal, you will make back that cost quickly and you'll be done with the PMI monthly obligation.