Ray Tolley asked:




Most first-time home buyers opt for conventional mortgage financing. More than half of all borrowers are able to make a down payment of at least 20 percent, but for those of us who can’t – there’s private mortgage insurance (PMI). For any conventional mortgage with a down payment of less than 20 percent, you’re going to have to pay for PMI.

Keep reading to learn how private mortgage insurance works, how much it costs and how you can save money paying for it!

How much does it cost?

The cost of private mortgage insurance ranges from approximately .4 percent to about 1.5 percent of the loan balance, but this will depend on the term length of the mortgage and the size of down payment you do make. Because private mortgage insurance protects the lender from a default by you, the borrower, the higher your down payment, the lower that risk.

Here’s a breakdown of average private mortgage insurance rates based on the size of the down payment and the term of the fixed, conventional mortgage:

5% Down Payment

30-Year Fixed Mortgage: .78%

15-Year Fixed Mortgage: .72%

1-Year ARM (Adjustable Rate Mortgage): .92%

10% Down Payment

30-Year Fixed Mortgage: .52%

15-Year Fixed Mortgage: .46%

1-Year ARM (Adjustable Rate Mortgage): .65%

15% Down Payment

30-Year Fixed Mortgage: .32%

15-Year Fixed Mortgage: .26%

1-Year ARM (Adjustable Rate Mortgage): .37%

You can see that the private mortgage insurance payment goes down when you increase your down payment. The payment is also reduced when the length of the mortgage shortens from 30 years to 15 years.

How do I pay for private mortgage insurance?

The normal option, used by the majority of home buyers, is to simply pay your PMI on a monthly basis with it bundled into your monthly mortgage payments. At closing, usually two months worth of interest is kept in escrow by the bank.

A less common way is to pay for PMI as a single-premium cost. On loans with a down payment of at least 10 percent, buyers can pay the entire private mortgage insurance premium up front or finance it back into the loan, resulting in a tax deduction for you.

A final option is called “lender paid mortgage insurance.” The lender pays the premiums and in turn, increases your interest rate. So, while your interest rate would be higher, you wouldn’t have monthly PMI payments and your larger interest payments would be tax deductible.

Whichever of the above options you select has its benefits and disadvantages. You should weigh them all carefully to make a comfortable decision before going to settlement on a home.

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