How to Calculate PMI on an FHA Loan

If you’re taking out an FHA loan, you’ll be required to pay for private mortgage insurance (PMI). This protects the lender in case you default on the loan. The amount of PMI you’ll pay will depend on several factors, including the size of your down payment and the loan-to-value ratio of your mortgage.

You can use this calculator to estimate your PMI payments. Just enter your loan amount, term, and interest rate to get started.

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Mortgage Insurance Basics

Private Mortgage Insurance, or PMI, is insurance that homebuyers are required to purchase if they’re making a down payment that’s less than 20% of the home’s sale price. If you’re currently paying PMI on your mortgage loan, you may be wondering how to calculate it. The answer is actually quite simple.

What is private mortgage insurance (PMI)?

Private mortgage insurance, or PMI, is required on most home loans with a down payment of less than 20%. It protects the lender in case you were to default on your loan.

Most people with private mortgage insurance have conventional loans. Conventional lenders require PMI when borrowers make a down payment of less than 20% because they’re worried that you may not be able to cover the remaining balance if you have to sell your home in a downturn or default on your loan

FHA loans are different. The Federal Housing Administration, the government agency that insures FHA loans, requires two types of mortgage insurance: upfront and annual.

With upfront mortgage insurance, borrowers finance the cost of the premium into their loan. Annual mortgage insurance is paid in monthly installments along with your regular loan payments.

How does PMI work?

Private Mortgage Insurance (PMI) is insurance that protects the lender in the event that you default on your home loan. It is required if you have a conventional loan and make a down payment of less than 20 percent of the home’s value. It is also required if you have an FHA loan with a down payment of less than 10 percent.

PMI is typically paid as part of your monthly mortgage payment. The amount of PMI you pay will depend on the size of your down payment, the type of loan you have, and the lender.

You can typically cancel PMI when you reach 20 percent equity in your home. This means that if your home is worth $100,000, you would need to owe no more than $80,000 on your mortgage in order to cancel PMI. You can also ask your lender to cancel PMI when you reach 22 percent equity in your home.

Who pays for PMI?

The buyer is responsible for paying the monthly PMI premium on most conventional loans with less than a 20% down payment. (However, some lenders will allow the seller to pay this fee.) You can ask to cancel PMI when you reach 80% loan-to-value ratio based on the original value of your home.

On government-backed loans like FHA, the buyer is also responsible for paying monthly mortgage insurance premiums. These monthly premiums are required for the life of the loan and can be added to your mortgage payment or paid separately. If you choose to pay your mortgage insurance separately, keep in mind that you’ll need to budget for this additional payment every month.

How to Calculate PMI on an FHA Loan

FHA loans are one of the most popular types of mortgages available, but they typically require borrowers to pay private mortgage insurance (PMI) as well. This insurance protects the lender in the event that the borrower defaults on the loan. Borrowers are required to pay PMI if they are not putting down at least 20 percent on the loan. So, if you are taking out an FHA loan for $200,000, you would be responsible for paying $4,000 a year in PMI ($200,000 x .02 = $4,000).

Determine the loan-to-value (LTV) ratio

The loan-to-value ratio is the loan amount divided by the appraised value of the property. To calculate the LTV, divide your loan amount by your home’s estimated value. For example, if your loan is $70,000 and your home is appraised at $100,000, this would give you a loan-to-value ratio of .70.

Find the annual premium rate

FHA mortgage insurance premiums are calculated using a loan-to-value ratio (LTV), which is the ratio of the amount being borrowed to the appraised value of the property. The annual premium is divided into 12 monthly installments and added to your mortgage payment.

To calculate the annual premium rate, divide the loan amount by 1200 and multiply by .85% for loans with terms of 15 years or less, or .80% for loans with terms greater than 15 years.

Calculate the monthly premium

The monthly premium is calculated based on the loan amount, and the annual premium is divided by 12 to get the monthly premium.

To calculate the monthly premium, divide the annual premium by 12. The resultant number is the monthly insurance premium, which must be paid as part of the monthly mortgage payment.

How to Cancel PMI on an FHA Loan

For FHA loans with a case number assigned on or after June 3, 2013, there is no requirement to continue paying for PMI insurance. You can request to have PMI removed when you reach 78% loan-to-value ratio on your home.

Meet the requirements for automatic termination

You must meet two conditions for your PMI to be automatically cancelled. The first is that you must reach what’s called the 78 percent loan-to-value ratio. This means that your loan balance is 78 percent or less of the home’s value. The second requirement is that you must have made all of your payments on time, for at least five years.

Request cancellation from your lender

The Federal Housing Administration insures mortgages backed by participating lenders. Borrowers with FHA-backed loans pay for mortgage insurance, which protects the lender in the event of loan default. You can request cancellation of your mortgage insurance when you reach 22 percent equity in your home, based on the original purchase price or appraised value at the time you took out the loan. You can also cancel it once you reach 78 percent loan-to-value ratio, regardless of when you purchased your home.

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