Does Private Mortgage Insurance Vary From Bank to Bank?

Private mortgage insurance protects the lender against your default on the loan, and you pay the premiums for the insurance coverage. You pay to insure against your own potential default. PMI costs add a significant amount to your mortgage every month, usually $20 to $100, according to the Federal Reserve Bank of San Francisco. The percentage cost depends on your down payment, your loan and maybe your bank.

History

• Lenders required substantial down payments for years, but as more Americans wanted to gain homeowner status with less money down, the private mortgage insurance industry developed. PMI allows more Americans to purchase homes because the lenders require less money as a down payment. Lenders can do this with protection afforded by PMI. With PMI, the American family pays 3 percent down and becomes a homeowner. A small group of about seven companies are PMI insurers under Mortgage Insurance Companies of America, according to a Wake Forest Law School article.

Considerations

• Bankrate.com reports that PMI costs about 1/2 percent of the loan, citing Mortgage Bankers Association of America as the source. According to Lee Colquitt in a University of West Georgia report, a 30-year loan with 5 percent down often incurs a PMI of 0.78 percent of the original loan amount. Ten percent down is 0.52 percent, and 15 percent down is 0.32 percent. After 20 years, the PMI commonly decreases to 0.20 percent per month. PMI premiums range from $250 to $1,200 a year, according to the Federal Reserve Bank of San Francisco.

Significance

• The lender controls the necessity for PMI, and the cost relates to factors determined by you and the lender. The more money you pay down, the lower the cost of PMI. PMI is not required for any loans except FHA in 2010 if the buyer pays 20 percent or more as a down payment at the closing. Also, the smaller loan has a lower PMI premium. The lender makes PMI calculations on a percentage of the loan, not a percentage of what you paid for the house.

Potential

• Bank lenders have some flexibility. Some banks offering conventional mortgages may work with the borrower to provide a loan without PMI. These banks usually increase the interest rate on the entire length of the loan, according to Bankrate.com. This may work to your advantage.

Alternatives

• Calculate an increase in the interest rate on the loan to see if this is beneficial to you. If your interest rate increases by 3/4 to 1 percent as reported by Bankrate, this will increase your loan and your payments for the duration of the loan. PMI may be collected only until the loan reaches the 50 percent mark, even for high-risk lenders. However, the interest on the loan is tax-deductible and PMI payments are not.

  An 80-10-10 loan may also make the PMI less expensive. This loan finances the 80 percent separately from the 10 percent. The buyer pays 10 percent down. The first mortgage at 80 percent requires no PMI insurance. The second mortgage covering 10 percent of the loan is at a higher interest rate, but may be less expensive than the PMI.