How your credit score affects your PMI rates
Most people are aware that their credit score affects their interest rate. But credit also helps determine monthly private mortgage insurance (PMI).
The difference in that premium from one credit score range to another can be significant. In fact, it can amount to tens of thousands of dollars over the life of the loan.
How much your credit score will affect PMI: Examples
PMI quotes vary based on loan amount, down payment, loan type, and of course, payment. We’ll make some assumptions for our calculations.
- Conventional Fannie Mae or Freddie Mac 30-year fixed
- Loan amount: $250,000
- Down payment: 5% (95% LTV)
- 30% insurance (if you default on the loan, the mortgage insurance company pays the lender 30% of the loan amount)
We’re going to use a PMI premium rate chart from MGIC, one of the largest mortgage insurance companies. Note that lenders can use a variety of companies, and PMI rates change often. Rates shown here are for example purposes only.
Formula: (Mortgage amount X PMI factor) divided by 12 months
Let’s calculate the PMI premium for each credit score range and see how much of credit scores impact PMI rates.
PMI rates by credit score
The below assumes 5% down and 30% PMI coverage on a 30-year fixed conventional mortgage.
|Loan amount||Score||PMI factor||Yearly total||Monthly PMI|
It’s easy to see how a good credit score can help your home buying goals.
Good credit makes a big difference
Someone with a 760 score will pay about $216 less per month in PMI compared to someone with a 620. That’s real motivation to improve your credit score before you buy a home.
700 – 719 is considered to be a good credit score range to be in. But notice that the monthly premium is $162.50, which is more than twice the $79.17 per month that applies for a credit score of 760 or higher.
That’s how your credit score affects the PMI premium you will pay.
Do FHA mortgage insurance premiums change by credit score?
FHA mortgage insurance premiums do not rise or fall based on credit score. Rather, they are based on down payment and loan amount.
That’s why those with fair or poor credit often end up with a lower overall monthly payment when they choose FHA over a conventional loan.
Someone putting 3.5% down on an FHA loan, with a loan amount less than $625,500 will pay a mortgage insurance premium factor of 0.85% per year, or about $71 per $100,000 borrowed.
Compare that to 1.33% PMI for someone with a 640 score getting a 5% down conventional: about $111 per $100,000 borrowed.
On a $350,000 loan, a 640-score borrower will save about $140 per month in mortgage insurance costs by choosing FHA vs conventional.
What is PMI, anyway?
PMI is required on conventional mortgages where the borrower has less than 20% equity in the property. Expressed another way, it is required any time the mortgage on a property exceeds 80% of the property value.
Mortgage lenders will require PMI to reduce their risk on such loans. The general experience on mortgages is that the default rate increases as the borrower’s equity falls below 20%.
PMI is an insurance policy that pays the lender in the event that you default on the loan. They don’t pay the entire loan amount, but rather a certain percentage. Since lenders are generally able to recover much or most of the mortgage amount from the sale of the property, PMI covers only a relatively small percentage of the loan. The percentage can range between 6% and 35% of the loan amount.
PMI is collected as part of your monthly mortgage payment. You’ve probably heard the term “PITI,” which refers to Principal, Interest, Taxes and Insurance; PMI is in the insurance part of the payment.
Understand however that PMI is not homeowners insurance. That’s a type of coverage that you are also required to have; that ensures the property against physical damage.
Check your homebuying eligibility
Even if you don’t have 20% down, it’s still a good idea to consider buying a home.
Those who wait to have a 20% down payment often lose years of building home equity.