How is PMI on a loan calculated?February 14, 2013 2:35 PM   Subscribe

How is PMI on a loan calculated?

I googled "math behind mortgage calculator" and while the equation looked scary it was really no problem.

The same googling got me nowhere with PMI and this is just ruining my day in trying to further hone my already overly elaborate monthly cost of buying a first place spreadsheet.
posted by skrozidile to Work & Money (3 answers total)

If you are talking about a conventional loan (as opposed to FHA which has set guidelines), it's usually a percentage of the original loan amount, like 0.75 percent annually, but it can vary from lender to lender.
posted by payoto at 2:38 PM on February 14, 2013

PMI isn't going to be a simple formula like that. Its going to be underwritten just like your auto insurance would be. To give you an idea of what the inputs are take a look at MGIC's Rate Finder.

There are rules of thumb though - assume its like 1% of the loan annually and you'll be on the high side of reasonable.
posted by JPD at 5:04 PM on February 14, 2013

PMI is "private mortgage insurance". Rates are calculated not by applying an easily-derivable equation, like mortgages are, but a series of rules and rates derived from actuarial tables. These tables aren't readily available to the public, and the use of these tables to create rates is the subject of something like a dozen professional licensure exams. In other words, this is non-trivial. You can probably find the rules and rates that a particular insurer uses, as most departments of insurance require such things to be filed and thus a matter of public record, but they aren't going to do you any good without actuarial experience and access to other information you aren't going to have.

That being said, PMI isn't as complex as other kinds of insurance, in that there's basically only one loss--the mortgagor will either default or they won't--and the maximum possible loss is known ahead of time. So even if we can't actually give you a useful rate equation, the range of possible premiums is possible to estimate. Here's a basic rule of thumb matrix, though even that observes that things are going to be different for non-traditional mortgages (sub-prime, ARM, jumbo, etc.) and it doesn't take into account things like credit history, location of the mortgaged property, etc.

Result: the PMI rate for a mortgage with less than 20% down is going to be somewhere between an annual 0.2% and 1.5% of the total loan amount depending on a variety of factors, such as the type of the loan, the size of the down payment, etc.
posted by valkyryn at 6:49 AM on February 15, 2013