Mortgage insurance premiums are calculated by multiplying your loan balance by an annual rate, then dividing by 12 to get the monthly cost. The exact rate depends on which type of loan you have, how much you put down, and (for conventional loans) your credit score. The math itself is straightforward once you know which rate applies to your situation.
Two Types of Mortgage Insurance
Conventional loans and FHA loans handle mortgage insurance differently, and the calculation method varies for each. On a conventional loan, private mortgage insurance (PMI) is required when your down payment is less than 20%. On an FHA loan, the government charges its own mortgage insurance premium (MIP) regardless of your down payment size. Each uses a different rate structure and different rules for when the insurance ends.
Calculating PMI on a Conventional Loan
PMI rates on conventional loans typically range from about 0.2% to over 2% of the loan amount per year. Your specific rate is set by the mortgage insurance company based on your credit score, your loan-to-value (LTV) ratio, and the coverage level your lender requires. A borrower with a 760 credit score putting 10% down will pay a far lower rate than someone with a 640 score putting 3% down.
The basic formula works like this:
- Annual PMI cost = Loan amount × PMI rate
- Monthly PMI cost = Annual PMI cost ÷ 12
For example, say you buy a $350,000 home with 10% down. Your loan amount is $315,000. If your PMI rate is 0.5% per year, the annual cost is $315,000 × 0.005 = $1,575. Divide by 12, and your monthly PMI payment is $131.25.
If the same borrower had a lower credit score and received a PMI rate of 1.2%, the math changes significantly: $315,000 × 0.012 = $3,780 per year, or $315 per month. That difference of nearly $184 a month shows why your credit score matters so much to the total cost of mortgage insurance.
Your lender will quote you the exact PMI rate when you receive your loan estimate. You do not shop for PMI yourself; the lender selects the mortgage insurer and coverage level. Fannie Mae requires coverage levels that increase with your LTV ratio. For a fixed-rate loan longer than 20 years, standard coverage is 6% at an LTV of 80.01% to 85%, 12% at 85.01% to 90%, 25% at 90.01% to 95%, and 35% at 95.01% to 97%. These percentages represent the share of the loan the insurer covers if you default, and higher coverage levels translate to higher premiums for you.
Calculating FHA Mortgage Insurance
FHA loans have two separate insurance charges: an upfront mortgage insurance premium (UFMIP) and an annual MIP that you pay monthly. You need to calculate both.
Upfront Premium
The UFMIP is 1.75% of your base loan amount, charged at closing. On a $300,000 FHA loan, that comes to $300,000 × 0.0175 = $5,250. Most borrowers roll this cost into the loan rather than paying it out of pocket, which increases the total amount you finance.
If you finance the UFMIP, your new loan balance becomes $305,250, and your monthly principal and interest payment is calculated on that higher amount.
Annual Premium
The annual MIP rate depends on your loan term, loan amount, and LTV ratio. For loans with terms longer than 15 years:
- LTV of 90% or less: 0.80% per year
- LTV above 90% up to 95%: 0.80% per year
- LTV above 95%: 0.85% per year
For loans with terms of 15 years or less, rates are lower, starting at 0.45% per year for LTV ratios of 90% or below.
The simplified monthly calculation is:
- Annual MIP = Outstanding loan balance × Annual MIP rate
- Monthly MIP = Annual MIP ÷ 12
Using the example above with a $305,250 balance (after rolling in the UFMIP) and a 0.85% annual rate: $305,250 × 0.0085 = $2,594.63 per year, or about $216.22 per month.
HUD’s precise method is slightly more involved. It computes the average outstanding balance over the upcoming 12-month period based on your amortization schedule, applies the annual MIP rate to that average, adjusts for any financed UFMIP, and divides by 12. This means your monthly MIP decreases slightly each year as the balance drops. But for estimating your costs before closing, the simplified formula above gets you within a few dollars of the actual figure.
How Long You Pay Mortgage Insurance
The rules for getting rid of mortgage insurance depend entirely on your loan type.
For conventional loans with PMI, you can request cancellation once your principal balance is scheduled to reach 80% of the home’s original value. You do not need to wait for the balance to actually hit that point; you can request it on the date it was originally scheduled to reach 80% LTV. If you do not request cancellation, your lender must automatically terminate PMI when the balance is scheduled to reach 78% of the original value. Making extra payments can help you reach these thresholds faster, though you may need a current appraisal to prove the value if you want to use home appreciation to your advantage.
FHA annual MIP is harder to shake. If you put down less than 10% (LTV above 90%), you pay MIP for the entire life of the loan. If you put down 10% or more, MIP drops off after 11 years. The only way to eliminate FHA mortgage insurance early on a low-down-payment loan is to refinance into a conventional loan once you have enough equity.
VA Funding Fee: A Different Structure
VA loans do not charge monthly mortgage insurance at all. Instead, eligible veterans and service members pay a one-time VA funding fee at closing. For a first-time VA purchase loan with less than 5% down, the fee is 2.15% of the loan amount. On a $300,000 loan, that works out to $6,450. The fee drops with a larger down payment: 1.5% with 5% or more down, and 1.25% with 10% or more down. Veterans using the benefit after their first use pay a higher fee of 3.3% with less than 5% down. Like the FHA upfront premium, the VA funding fee can be rolled into the loan balance.
Some veterans are exempt from the funding fee entirely, including those receiving VA disability compensation.
Putting It All Together
To estimate your own mortgage insurance cost, follow these steps:
- Determine your LTV ratio: Divide your loan amount by the home’s appraised value. A $285,000 loan on a $300,000 home is a 95% LTV.
- Identify your loan type: Conventional, FHA, or VA. Each has its own rate schedule.
- Find your applicable rate: For conventional loans, your lender provides this based on your credit score and LTV. For FHA loans, use the published rate tables based on loan term and LTV.
- Calculate the annual cost: Multiply your loan balance by the annual rate.
- Divide by 12: This gives you the monthly addition to your mortgage payment.
- Add any upfront fees: For FHA (1.75% UFMIP) or VA (varies), factor in the one-time charge, especially if you plan to finance it into the loan.
On a $300,000 home with 5% down, your loan amount is $285,000. With a conventional PMI rate of 0.7%, your monthly PMI is about $166. With an FHA loan at 0.85% annual MIP plus the financed UFMIP, your monthly MIP starts around $205, and you also owe $4,988 upfront. That gap can add up to tens of thousands of dollars over the life of the loan, which is why comparing loan types before you commit is worth the effort.