Understanding Mortgage Insurance

Note: This article pertains to conforming loan products. FHA, Rural Housing and VA loans all have different rules pertaining to mortgage insurance.

Mortgage Insurance (MI), also referred to as Private Mortgage Insurance (PMI), insures a portion of the equity for conforming loans in the event a home owner defaults on the mortgage. It is required by many lenders when the first mortgage loan amount exceeds 80% of the value of the home. In the case of a purchase, the lender will look at the purchase price and the appraised value and use the lesser of the two. For example, if a home is purchased for $100,000 and the appraised value is $110,000, the value used will be based on the purchase price of $100,000. The amount of mortgage insurance a borrower pays depends on the loan to value, loan program and credit scores.

Loan to value (LTV) is usually expressed as a percentage as shown in the following example:

  • Purchase Price: $100,000
  • Loan Amount: $97,000
  • Loan to value = (Loan Amount ÷ Purchase Price) x 100
  • Loan to value = ($97,000 ÷ $100,000) x 100 = 97%

Mortgage Insurance companies break down the insurance premiums into the following LTV categories:

  • 97% - 95.01
  • 95% - 90.01%
  • 90% - 85.01%
  • 85% - 80.01%
  • 80% & below MI is typically not required

Within each LTV category there are different "factors" that are used to calculate the actual MI payment depending on credit score and the qualifying loan program. The chart below is only an example and is not intended to determine the actual mortgage insurance required. Other factors come in to play when determing the actual MI payment. Contact a mortgage specialist to determine the actual MI payment.

Private Mortgage Insurance Chart
Required
Coverage		 Credit Score
580 - 599		 Credit Score
600 - 619		 Credit Score
620 - 659		 Credit Score
660 or better
  MI Factor MI Factor MI Factor MI Factor
LTV 97% - 95.01%
35% .2.57% 1.88% 1.40% .92%
30% 2.24% 1.64% 1.23% .81%
25% 2.00% 1.47% 1.05% .69%
20% 1.86% 1.37% .86% .61%
18% 1.61% 1.18% .78% .59%
LTV 95% to 90.01%
30% 1.80% 1.32% .78% .78%
25% 1.61% 1.18% .67% .67%
16% 1.37% 1.00% .54% .54%
12% 1.26% .92% .48% .48%
LTV 90% - 85.01%
25% 1.22% .90% .52% .52%
20% 1.07% .79% .42% .42%
17% .98% .72% .39% .39%
12% .77% .57% .34% .34%
LTV 85% and below
25% 1.02% .75% .43% .43%
17% .83% .62% .37% .37%
12% .72% .53% .32% .32%
6% .61% .45% .26% .26%
Please note: Factors shown are base rates and may have additional add-ons depending on the loan scenario. Rates are subject to change at any time. Rates are for example purposes only. For accurate quotes please contact a mortgage specialist.

The formula to calculate the monthly MI payment is as follows:

  • Monthly MI = (Loan Amount x MI Factor) ÷ 12 months
  • For example if a borrower is purchasing a home for $100,000 with 97% financing, credit score of 650 and a loan program that requires 35% coverage (factor would be 1.40%), the MI payment would be:
  • Monthly MI = ($97,000 x .0140*) ÷ 12 months
  • (Note: 1.40% is equivalent to .0140. Divide by 12 months to get the monthly MI payment.)
  • Monthly MI = $113.67 per month

The percentage of coverage required is dependant on the loan program. Contact your loan officer to determine which loan programs are available for your loan scenario.

A borrower can avoid paying mortgage insurance by structuring a mortgage as an 80% 1st mortgage and a 2nd mortgage to cover the difference. Lenders may also offer higher rates in lieu of paying mortgage insurance. These programs are referred to as "Lender Paid MI". Contact a Mortgage Specialist to calculate the payments for each loan program to determine which program is best for you.