If you are financing more than 80% of the value of a home, lenders require extra risk protection against the possibility of you defaulting. Usually this comes in the form of private mortgage insurance (PMI). Simply stated, PMI is a premium you must pay each month until you are financing less than 80% of the home’s value. I’ve run a few posts recently about PMI (a loan primer and tax deductibility), and this post will focus on how the lender determines how much your PMI will be.

It turns out this is actually a pretty simple formula. The cost is a percentage of the loan amount. That percentage depends on what percentage the mortgage is of the home value.

  • For a 30 year fixed loan
    • 80% < mortgage <= 85% of home value, PMI is 0.32% of mortgage amount, annually
    • 85% < mortgage <= 90% of home value, PMI is 0.58% of mortgage amount, annually
    • 90% < mortgage <= 95% of home value, PMI is 0.78% of mortgage amount, annually
  • For a 15 year fixed loan
    • 80% < mortgage <= 85% of home value, PMI is 0.26% of mortgage amount, annually
    • 85% < mortgage <= 90% of home value, PMI is 0.46% of mortgage amount, annually
    • 90% < mortgage <= 95% of home value, PMI is 0.72% of mortgage amount, annually
  • For a 30 year adjustable loan
    • 80% < mortgage <= 85% of home value, PMI is 0.37% of mortgage amount, annually
    • 85% < mortgage <= 90% of home value, PMI is 0.63% of mortgage amount, annually
    • 90% < mortgage <= 95% of home value, PMI is 0.92% of mortgage amount, annually

I initially came across this breakdown here, and I have confirmed its accuracy via my own good faith estimates (GFE’s).

Some brief background information that I picked up from asking my lender. PMI rates are controlled by the federal government. There are only a handful (3?) of PMI companies even out there. But because the rates are set by the government, you don’t have to worry about who your PMI company is (and you certainly don’t have to choose one — the bank does). In fact, when I asked my lender who my PMI company would be, he said he didn’t even honestly know (because it doesn’t really matter).

Like me, you probably see PMI as “lost” money. It doesn’t pay down your mortgage — you just need to pay for the opportunity to buy a more expensive house. Therefore, PMI payments should be minimized. You’ll notice the percentage of the mortgage that your PMI payments are is higher if you put less down (and this makes sense). Therefore, these numbers might give you more incentive to put more money down (minimize your PMI payment).

For example, initially my girl friend and I intended to put 5% down. Our sale price is roughly $420k. So the down payment would be $21k. The remaining $399k would be financed. Using the standard mortgage approach, this would result in a PMI payment of $399,000*0.78% =$3112 annually. Or, $259.35 monthly. That’s a lot of “lost” money per month! Therefore, we actually decided to stretch a bit and put down 10%. Hence, we’ll put down $42k (significantly more), and finance $378k. Our PMI payment would be $378,000*0.58% =$2314 annually. Or, $192.85 monthly. This number is partially lower because the amount financed is lower ($379k vs. $399k), but it is mostly lower because the PMI percentage factor is significantly lower (0.58% vs 0.78%). Ultimately, this results in roughly $70 a month less of “lost money.”

Chances are you are going to put down what you can afford (for us, that extra $21k had to come from somewhere!), but hopefully this gives you a bit better understanding of the impacts of putting more or less money down.

In the end, my girl friend and I are planning on putting 10% but going with a lender paid PMI option, so the above analysis does not directly apply. However, the additional interest rate hit you take when going to a lender paid PMI option is also a function of what percentage you put down, hence we still chose to put down 10%.