How do you Calculate Private Mortgage Insurance (PMI)?

Private Mortgage Insurance, often shortened as PMI, is a mortgage insurance that a home buyer is required to pay for in case of a conventional loan. Like the several other kinds of insurance, it also protects the lender and not the buyer, but the money goes out of the latter’s pocket.

Who provides the PMI are the private insurance companies, and it is usually paid in cases where the down payment made for the house is less than 20 percent of its purchasing price. You are also required to pay for PMI in case you are using a conventional loan to refinance the house and your equity is less than 20 percent of its value.

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How To Calculate Mortgage?

There are a number of factors that determine how much premium you will have to pay on PMI. The type of mortgage and the duration of your loan are to name a few. The purchasing price of the property, the loan-to-value or LTV ratio, which is the ratio of the loan to the total value of the property, and the duration and type of the loan are some things that you would need to know beforehand.

Based on the various factors, your PMI rate can vary from 0.3 percent to 1.15 percent of the total loan borrowed. You can find the exact rate applicable in your case through the table available on the lender’s website. After that, you can do the math by multiplying the rate applicable with the loan amount. The answer you get will be the annual premium.

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How Long Do You Pay It?

It is important to note that you do not need PMI if you create enough equity in the property. Once you have acquired 20 percent ownership in your home, you can submit a request to your lender to cancel the mortgage insurance. Lenders only automatically cancel the mortgage insurance when you reach 22 percent equity, but you can make a request for the same once you are at over 20.

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How Do You Pay It?

Your lender may require you to pay monthly premiums or a one-time upfront premium at the time of closing. In the former case, the mortgage payment is added to your monthly mortgage payment. You can find it on your loan estimates or closing disclosure in the Projected Payment section of your loan documents. In case you are going for the one-time PMI premium payment, you cannot ask for a refund if you choose to refinance the property or move.

There is also a third option where you make a small one-time upfront payment as well as pay monthly premiums. Most of the time, the lender offers more than one option, and it would be better if you ask them the total cost of financing in both cases before you pick one.

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We hope that is all you wanted to know. Share your thoughts about the post through your comments in the box below.

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