How private mortgage insurance works

Private mortgage insurance exists because a small down payment leaves the lender more exposed if the house is sold in a shortfall. The premium is typically a percent of the original loan, paid monthly, and it does not fall as the principal falls. It sits on top of the scheduled principal-and-interest payment.

On a $400,000 home with $20,000 down the loan is $380,000, loan-to-value is 95 percent, and a 0.60 percent annual PMI rate is $380000 \times 0.006 / 12 = 190$ a month, $190, every month until cancellation. That $190 is on top of the scheduled principal-and-interest payment of $2,401.86. It is not added to the 6.5 percent rate. A reader who adds 0.60 percent to 6.5 and recomputes the payment has described a different loan, one whose extra 0.60 percent lasts 30 years instead of 124 months.

The loan payment calculator is the principal-and-interest piece. This page is the insurance rider, and the two have different end dates. How mortgages work is the surrounding machinery: the lien, loan-to-value, escrow.

Under US rules a borrower can usually ask for cancellation once the amortised balance hits 80 percent of the original purchase price, and cancellation is automatic a little later, at 78 percent. This calculator uses 80 percent of original price, on the amortisation schedule, which is the borrower-request point. It does not revalue the house. A rising market can get you to 80 percent of current value sooner; a falling market later. The formula does not know the market.

On the default, 80 percent of $400,000 is $320,000. The balance on a $380,000 30-year loan at 6.5 percent falls to that level in month 124. Total PMI is $124 \times 190 = 23560$, $23,560.

A 10 percent down payment on a $350,000 home, 0.50 percent PMI, 6 percent over 30 years, starts at 90 percent LTV on a $315,000 loan and drops PMI after 89 months, $11,681.25 in total, at $131.25 a month. The scheduled payment is $1,888.58.

Extra principal, the mortgage payoff calculator, shortens the wait, because the balance hits 80 percent sooner. This page assumes the scheduled payment only, so the month count is the slowest usual path.

At 20 percent down, loan-to-value is 80 percent on day one, so the threshold is already met and months of PMI is 0. On a $400,000 home that is a $80,000 down payment and a $320,000 loan. Total PMI is $0. That is why 20 percent is the number people quote, and it is also why a 19 percent down payment and a 20 percent down payment are not almost the same product. One of them has a monthly rider for years; the other does not.

Whether bringing the extra cash to closing is cheaper than paying PMI is a comparison of this page's total against the cost of that extra cash, forgone return, or extra months of saving. This calculator names the PMI side. It will not name the opportunity cost of the extra cash.

Some PMI is a percent of the declining balance, some is a monthly dollar figure, some is financed into the loan. The quote on the loan estimate is the one to type in. A 0.60 percent of original loan is the default here because it is the form that makes the month count matter: the premium stays flat until it vanishes, so 124 months is 124 times the same $190.

FHA mortgage insurance is a different product with an upfront premium and, for many loans, an annual premium that does not cancel at 80 percent. Do not run an FHA loan through this calculator and call it PMI. The identity on this page is conventional PMI cancelling at 80 percent of original value.

Folding the PMI rate into the loan rate and amortising it for 30 years is the substitution that costs the most. 0.60 percent of $380,000 for 30 years is a different, larger bill than 0.60 percent for 124 months. PMI stops. Interest does not. Add them into one rate and you will overstate the cost of a 5 percent down payment, sometimes by enough to flip a bring-20-percent decision that the month-count arithmetic would not have flipped.

The mortgage affordability calculator is the payment-against-income test. PMI is a rider on top of that payment until it cancels.

The figures throughout are teaching loans: a $400,000 home with $20,000 down, a $350,000 home with $35,000 down, and a 20 percent down payment that turns PMI off on day one. They are there so every published number can be re-derived. US cancellation rules are stated as US rules, not as a universal identity. This is educational material, not financial advice.