How to Calculate PMI

Private mortgage insurance is a type of insurance the borrower may have to pay if they don’t have 20% for a down payment. Lenders rely on these payments to mitigate financial risk when issuing mortgages for first-time homebuyers or for loan refinancing.  

PMI payments are required in two circumstances: 

• For conventional loans without a down payment of at least 20% 
• For refinancing loans where the loan-to-value ratio exceeds 80% 

Some lenders will approve you for a conventional loan with as little as 3% down. But to protect themselves against this financial risk, they’ll ask borrowers to make monthly private mortgage insurance payments. These monthly payments are usually rolled together with the monthly mortgage payment. Keep in mind that some loan programs do not require these payments. 

USDA and VA loans don’t require any down payment, nor do they require private mortgage insurance.  

Your total private mortgage insurance amount will always be a percentage of your total mortgage. The average PMI costs are between 0.22% and 2.25% of your mortgage. But your exact percentage will depend on your lender as well as your own financial situation. 

Several PMI payment methods are available, with advantages and considerations for each. 

The exact amount of your private mortgage insurance payments will depend on a number of factors. The following factors will influence your rates.

Your lender can provide you with your expected PMI range. Alternatively, you can use the average range (0.22% to 2.25%) to make an estimate of your expected monthly PMI payments. 

To calculate your PMI payments, simply multiply your total loan amount by your PMI percentage. The result is your annual premium. Divide this number by 12 to calculate your estimated monthly payment, though remember that this number will be added to your mortgage premiums. 

So if your home’s total value is $270,000 and you put down $20,000, your mortgage amount will be $250,000. You can calculate your PMI range by multiplying this number by the upper and lower limit: 

• 0.22%: $550/year, $46/month 
• 2.25%: $5625/year, $469/month 

This difference highlights why it’s beneficial to keep your PMI payments as low as possible — or avoid them altogether.

Naturally, you want to avoid PMI payments, which only add to your monthly mortgage premiums. Here are several ways to get out of PMI payments. 

• Make a 20% down payment: The best way to avoid private mortgage insurance is to simply make a traditional 20% down payment. Yes, this can take a bit longer to save, but it will help you avoid the added cost of PMI payments. Additionally, a higher down payment may help you qualify for a larger mortgage and open up better lending options. 

• Pursue a higher-interest loan: PMI payments and interest payments actually serve the same purpose — they both protect lenders when issuing large loans such as a traditional mortgage. You may be able to avoid costly payments by agreeing to a higher interest rate. Just be careful that you don’t end up paying more in interest than you would with a monthly PMI payment. 

• Consider other loan options: If you can’t afford a 20% down payment, there are other loan types available. USDA loans and VA loans don’t require any down payment, though each has its own eligibility requirements. CrossCountry Mortgage’s Bye Bye PMI loan program is another way to avoid PMI. 

The same can’t be said for loans backed by the Federal Housing Administration (FHA). As long as your credit score is above 500, you may qualify for a loan with a down payment as low as 10%. You may qualify for even less down if your credit score is at least 580. 

But FHA loans down require you to pay something called a mortgage insurance premium (MIP) that serves the same function as a private mortgage insurance payment. 

On the one hand, private mortgage insurance payments add to your total cost. But they can become a necessary expense for homebuyers looking to purchase a home with less than 20% down. Thus, they protect lenders while empowering buyers to find the home of their dreams without sacrificing their savings.