Up your credit score and PMI will go down

By Melissa Wirkus

Everyone knows that your credit score is tied to a lot of different business transactions, especially lending. The higher your credit score, the better rates you will receive on any loan you take out, especially your mortgage.

But one thing that most people do not think about concerning their mortgage and credit score is their score’s affect on their Private Mortgage Insurance, or PMI.

An October 19, 2006 article by Amy Buttell Crane of Bankrate.com, “Low credit score means high PMI rates,” discusses the relationship between these two things.

“If you're in the market for a new home and your credit score is marginal, your private mortgage insurance, or PMI, rate might be hundreds of dollars higher per month than you expect.”

“Credit scores impact interest rates on all types of loans, but their effects reach far beyond loan rates, resulting in additional expenses that can run into thousands of dollars per year.”

PMI is required on a loan when a potential homeowner wants to borrow over 80 percent of the home’s value. PMI payments are typically paid every month in addition to the homeowner’s monthly mortgage payment.

PMI protects the lender, not the borrower, because the lender is protecting themselves from the risk of lending such a grand sum of money to someone who may not have the most trustworthy credit history.

In addition to your credit score, lenders also look at a variety of other factors when determining your PMI, including the size of your down payment, the type of loan issued and interest rates.

“‘If your credit score is in a range where you fall into a subprime category, you will pay a higher PMI rate,’ says Bob Walters, chief economist at Quicken Loans, a lending company. ‘This is not just based on your credit score, but it is a basic principle of risk management. If your loan is deemed as riskier in terms of your ability to repay, you will pay more in interest on the loan, PMI and in your closing costs.’”

Credit scores can range anywhere from 300-900. A credit score below 620, usually constitutes that person as a sub-prime borrower, thus upping the cost of a PMI payment.

PMI “shock” comes most often when many almost-homeowners get to the closing table and realize the payment for their mortgage insurance is going to be much more than previously expected. The best thing you can do to avoid a situation like this is to be realistic, and budget for a PMI payments that is much higher than expected.

“‘We have clients that were initially given a good-faith estimate of $50 to $75 a month in PMI costs and then they find out at closing that the actual PMI rate is hundreds of dollars higher,’ says attorney Terry Smiljanich of the James Hoyer law firm in Tampa, Fla. ‘In many cases, this is because their PMI premium was initially based on the premise that the borrowers were in a good credit quality category, when they actually ended up in a subprime category.’”

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