Private Mortgage Insurance helps you get the loan

Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be required to obtain in order to get a mortgage loan. Depending on the type of loan whether FHA, USDA or Conventional, PMI companies work differently. PMI is an insurance policy that helps the lender recover some or all of of their investment in the property in case you default on your mortgage. PMI is provided by private (non-government) companies on conventional loans and is usually required when your loan-to-value(LTV) ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent. On FHA or USDA loans, a government agency is the insurer and the rules to calculate PMI are different than conventional loans.

PMI isn't a bad thing — it allows you to make a lower down payment and still qualify for a mortgage loan. In fact without PMI, many of us would not be able to purchase our first home.

PMI calculation on Conventional Loans

Your PMI premium is fixed based on plan type (loan-to-value(LTV) ratio, loan type, loan term, credit score, etc.) and is not related to any individual characteristics. PMI typically amounts to about one-half of one percent of your mortgage amount annually, according to the Mortgage Bankers Association, and the premium payment is usually rolled into your monthly mortgage payment. Since the method for calculating it is so dependent on the borrower and LTV, the monthly payment can vary widely. Should you default on your mortgage, the PMI company would reimburse your lender for up to 20% of the original property value and your lender will proceed to foreclose your property. Most lenders require you to carry PMI for 2 years, after which time you can request it's elimination if you can prove that your LTV is now 80% or less. You will most likely be required to pay for an appraisal to determine your home value. Consult your lender for details.

PMI calculation on FHA Loans

On FHA loans there is an up front PMI and there is the monthly PMI. The upfront PMI(UFPMI) is typically 1.75% of the mortgage amount. On a typical $200K loan, this would amount to $3,500. Although this is part of the closing costs, this amount can and usually is, financed into the loan. Everyone pays for the UFPMI regardless of the LTV! In addition, there is a PMI amount added to the monthly mortgage payment. This is typically .55% of the mortgage amount divided by 12. For instance on a $200K loan, this .55% would be $1,100/year or $92/mth added to the mortgage payment. Should you default on your loan, FHA will pay off your balance in full and the government(Housing and Urban Development or HUD) will foreclose the property. The monthly PMI is not required if the LTV is under 90% and the loan term is 15 years or less. The monthly PMI can be eliminated when the LTV reaches 78% AND you have carried PMI for at least 5 years. Consult your lender for details.

PMI calculation on Rural Area(USDA) Loans

Rural area loans require a 2% of the loan amount upfront and no monthly PMI. What's even better on USDA loans is that the PMI can be financed even above the maximum LTV of 100% for a total of 102% financing. Should you default on your loan the USDA will foreclose on your property and pay off the balance in full.

PMI is now fully tax deductible through 2010. Check our blog for details.