My wife and I are still home shopping. We're planning to put down 20% on the purchase. Having a larger down payment will allow us to avoid paying PMI and will help protect us from ending up under water on the mortgage. I have looked at lower down payment and how that would change things.
Basics of PMI
PMI or Private Mortgage Insurance is extra insurance you have to pay on a mortgage if you do not have a large down payment. Generally lenders require PMI if you have less than 20% down payment. PMI allows a borrower to buy a home with a lower down payment, but they have to pay for the PMI. The insurance protects the lenders investment in the property.
How much is PMI?
The amount of PMI is proportional to the amount of the loan. PMI also goes up if you have a lower down payment and higher Loan To Value (LTV) ratio. Other than that I'm sure that PMI rates vary some from one insurer to another and may vary in different areas as well.
I ran some tests on Amerisave's website to check PMI rates for the purchase of a $100,000 home. I tested mortgages with down payments ranging from 5% to 20%.
Here are the results :
| Loan | LTV | PMI/mo | PMI rate |
| $95,000 | 95% | $74.42 | 0.940% |
| $94,000 | 94% | $73.63 | 0.940% |
| $91,000 | 91% | $71.28 | 0.940% |
| $90,000 | 90% | $46.50 | 0.620% |
| $87,000 | 87% | $44.95 | 0.620% |
| $85,000 | 85% | $26.95 | 0.380% |
| $81,000 | 81% | $25.65 | 0.380% |
| $80,000 | 80% | $0.00 | 0.000% |
so that equates to PMI rates for down payment ranges as follows:
| Down payment | PMI |
| >= 20% | 0 |
| 15%-20% | 0.38% |
| 10%-15% | 0.62% |
| 5-10% | 0.94% |
Keep in mind this is just one example from one vendor and the rates for PMI will vary.
Another thing to remember with PMI is that you're paying the PMI rate against the entire loan but the difference in the down payment is smaller by comparison. So for example look at the table above and we see that with $85k down you have a PMI rate of $26.95 per month or 0.38% of the mortgage. But with another $5,000 down you could avoid that $26.95 monthly bill. PMI is 0.38% of the entire mortgage but the bill equates to 6.468% of the $5,000 difference in down payment. That is in addition to the normal mortgage interests on the extra $5,000 you'd borrow. With rates around 4% today you'd be paying about 10.4% difference on that $5,000.
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