Cut the cost of PMI by learning where rates break

Private mortgage insurance can add other costs to your monthly payment when you finance with little or nothing down. Mortgage insurers, however, do not charge all borrowers the same amount of premium. Instead, they use risk-adjusted pricing. In a manner similar to the way lenders risk-adjust interest rates, conditions, and terms, mortgage insurers vary their premiums according to risk factors such as:

  • Loan-to-value (LTV)
  • Borrowers' credit scores
  • Amount of the mortgage
  • Debt ratios
  • Borrowers' financial profile such as net worth, cash reserves, job stability, and so on

For example, if your total debt ratio goes above, say, .38, the mortgage insurer boosts your monthly MI premium. Likewise, rates may break, respectively, at 5 percent down or less (95 percent LTV); 10 percent down or less (90 percent LTV); 15 percent down or less (85 percent LTV), or less than 20 percent down (greater than 880 percent LTV).

Should it turn out that your total debt ratio went to .40, and you were putting $29,700 down on a property priced at $301,500 (90.15 percent LTV), you could save considerably by tweaking your numbers. Place just a little more down, figure a way to reduce your monthly payments, and you will slip into a lower MI rate category. The same principle applies to your credit scores. Your credit score of 617 sets a higher mortgage premium than a score of 630. Learn where the PMI rates break, and with a little financial juggling, you might save $60 to $100 a month (more or less depending on the amount of your loan).

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