Estimating the Cost of Private Mortgage Insurance in California

What is the average cost of private mortgage insurance in California, and why do some people have to pay it when buying a house?

These are two of the most common questions home buyers have regarding PMI. This article explains the typical cost of private mortgage insurance in California, why it’s needed in some cases, and how it can affect you over the long term.

What Is Private Mortgage Insurance (PMI)?

Private mortgage insurance (PMI) is a type of insurance that lenders require borrowers to pay when they make a down payment of less than 20% on a home purchase. More specifically, it’s usually required when the loan-to-value ratio rises above 80%.

PMI protects the lender in case the borrower defaults on the loan. It gets added onto the monthly mortgage payment, increasing the size of those payments. But it also helps borrowers qualify for a loan they might not otherwise be able to get.

Once the borrower’s equity in the home reaches 20%, PMI can be canceled.

Private mortgage insurance allows California home buyers to obtain mortgage financing with a lower down payment. By extension, this means that buyers can purchase a home sooner rather than later, since they don’t have to save up as much money for a down payment.

Traditionally, lenders have required a 20% down payment as a way to mitigate their risk. But saving up that much money can be challenging, particularly for first-time home buyers in California. PMI bridges this gap by enabling borrowers to purchase a home with a down payment as low as 3% to 5%, depending on the loan program.

Average Cost of PMI in California

The annual premium amount for a California PMI policy is typically expressed as a percentage of the loan amount. According to data from the Urban Institute’s Housing Finance Policy Center, the average cost ranges from 0.58% to 1.86% of the loan amount, per year.

If we apply this range to current home prices in California, we can get a ballpark average for the annual cost of a PMI policy. As of early summer 2023, the median home value in California was around $738,000.

But the actual amount borrowed for a mortgage loan depends on the size of the borrower’s down payment. A National Association of Realtors survey found that the average down payment among first-time buyers in California and nationwide was 6%. The average among all buyers (including previous homeowners) was 12%.

So let’s assume we purchase a median-priced house for $738,000 and make a down payment of 12%. That would result in a loan amount of approximately $649,000.

But this is based on the PMI cost range provided by the Housing Finance Policy Center. If we cast the net wider and look at other sources, we get different ranges.

• For example, Chase Bank says: “On average, PMI costs range between 0.22% to 2.25% of your mortgage.”
• And the Freddie Mac website states: “While the amount you pay for PMI can vary, you can expect to pay approximately between $30 and $70 per month for every $100,000 borrowed.”

Plugging these numbers into our calculation would deliver very different results.

This is one reason why it’s so hard to identify the average cost for private mortgage insurance in California. There are variables on top of variables, and this can affect the actual amount that a homeowner pays in PMI.

For example, a person with a higher credit score might qualify for a lower PMI rate, compared to a borrower with a lower score. Additionally, the size of your down payment (and the resulting loan-to-value ratio) can also affect the cost of private mortgage insurance.

Strategies for Reducing Your Costs

Private mortgage insurance can be a significant expense for home buyers in California. Fortunately, there are several strategies that can help reduce PMI costs — or eliminate them altogether. Let’s explore some of these strategies:

1. Increase the down payment to eliminate the need for mortgage insurance.

One of the most straightforward ways to reduce or eliminate PMI costs is by increasing the down payment. By putting down a larger percentage of the home’s purchase price, California home buyers can reach the threshold that allows for PMI elimination.

When you make a down payment of 20% or more, you are considered to have enough equity in your home to protect the lender in case of a default. As a result, the lender will not require you to have a mortgage insurance policy.

Home buyers in California who have no choice but to use PMI can cancel it later on, once they reach a certain level of equity. Generally speaking, homeowners can cancel their mortgage insurance policies when the loan-to-value (LTV) ratio falls to 80% or below, as a result of making regular payments.

2. Improve your credit score to potentially qualify for a lower PMI rate.

Credit scores play a crucial role in determining PMI rates. Borrowers with higher credit scores typically qualify for lower premiums, which could lead to substantial savings over the long term.

Home buyers can build a strong credit history by paying bills on time, reducing outstanding debts, and maintaining low credit card balances. Monitoring credit reports regularly and addressing errors can also contribute to a higher score, potentially reducing PMI costs.

3. Consider piggyback loans as an alternative to PMI.

Home buyers in California can avoid mortgage insurance by using piggyback loans, also known as 80-10-10 or 80-15-5 loans. With this approach, the borrower makes a down payment of 10% or 15% and takes out a second mortgage for the remainder. By dividing the mortgage portion into two separate loans, borrowers can keep the individual LTV ratios below 80% and thereby avoid PMI.

Disclaimer: This article estimates the average cost of private mortgage insurance in California by using current home prices and typical down payment amounts. There are many variables that can determine the actual costs associated with a home loan. Because of this, portions of this article might not apply to your particular situation.