If you put less than 20% down on a home and you use conventional financing, you’ll pay Private Mortgage Insurance. This insurance covers the lender should you default on the loan. It’s a compensating factor for the lender, giving them reassurance that they won’t face a huge loss should you stop making your mortgage payments.
You pay PMI on a monthly basis in addition to your mortgage payment. Generally, you will pay principal, interest, real estate taxes, and mortgage insurance. You know you can shop around for the interest rate, but what about the PMI? Can you find cheaper options than what the lender offers?
Shopping Around for PMI
Your lender may not tell you this, but you can shop around for PMI. You don’t have to take what the lender offers at face value. Each provider has different requirements and therefore different rates, so it’s to your advantage to shop the rates.
While you won’t be able to negotiate the rates an insurance provider offers, you can shop around to see which one has the lowest costs. Keep in mind that depending on your qualifying factors, you may have limited choices in providers. Each provider has different requirements. Since PMI is based on risk, it’s to your advantage to make your loan profile carry as little risk as possible.
Your LTV and Credit Score
The two main factors of your PMI costs are your LTV and credit score. The higher your LTV, the more PMI you will pay. The opposite is true with your credit score, though. The lower your credit score, the higher the PMI rates you will pay.
Lenders see borrowers with high LTVs as high risk. The higher your LTV is, the less of your own money that you have invested. To a lender, this means that your risk of default is higher. If you aren’t at risk of losing much of your own money and you can’t afford the mortgage payment, you may just let the loan default.
Lenders also view borrowers with low credit scores as high risk. There’s a reason you have a low credit score. A part of that reasons could be late payments or defaulted loans. If you put the high LTV and low credit score together, you have the recipe for a rather high PMI payment.
Other Factors in PMI
While your LTV and credit score play an important role, other factors can also increase your PMI.
- The loan term – The longer you borrow the money, the higher the risk of default becomes for the lender. This is why you may find lower PMI rates if you take out a 15-year loan versus a 30-year loan.
- The type of loan – If you opt for adjustable rate mortgage versus a fixed rate, you are a higher risk. Because your interest rate can change, forcing your mortgage payment higher, this puts the lender at higher risk for default. Typically, fixed rate loans have lower PMI rates than ARM loans.
Keeping Your PMI Rates Low
So, is it worth shopping around for PMI rates? You might find that you can save a little money, but the difference might not be significant. Your best bet is to maximize your qualification factors. In other words, make your loan as stable as possible.
This could mean:
- Maximizing your credit score
- Lowering your debt ratio
- Putting more money down on the home
- Taking out a shorter term
Talk to a few lenders as you shop around for a loan. Ask them what you can change to help you lower your PMI costs. If you pose a low risk of default, chances are that you will get the best PMI rates available to you and you won’t even have to shop around.