Private mortgage insurance (PMI) is a type of insurance many homeowners are required to pay. If a person purchases a house and puts down less than 20 percent of the home's value, the lender charges PMI. This insurance is a protection for lenders against homeowners failing to make payments and possibly losing their homes. This insurance also allows people to purchase homes even if they do not have the necessary 20 percent down payment. Lenders calculate the amount of PMI by using several variables.
Things You'll Need
- Lender PMI rate chart
Determine the Loan to Value rate (LTV). LTV is the percentage comparing the amount of the loan compared to the value of the home. PMI is charged when LTV is 80 percent or higher. As the LTV increases, the amount of PMI increases. For example, assume a person purchasing a home puts down a 10 percent down payment. The LTV therefore is 90 percent.
Locate the length of the mortgage. Mortgages are generally given for 10, 15, 20 or 30 years. A 30-year mortgage generally has the highest PMI rate because the loan is paid off slower. Most companies separate PMI rates by either 30 years or less than 30 years. For this example, assume a person has a 30-year mortgage.
Find the rate the lender charges. Most lenders have a table showing current rates for PMI. The rates may change periodically. Using a chart provided on Daily Interest, a home-buying website, the rate for this loan is .52 percent.
Multiply the loan amount by the PMI rate. If the home is purchased for $200,000 and a 10 percent down payment is made, the down payment amount is $20,000. This makes the loan amount $180,000; multiplied by .0052, it yields an annual PMI amount of $936.
Divide the annual amount by 12 months, so $936 is divided by 12 to calculate a monthly amount of PMI of $78. Each month, this amount is added to the person's loan payment. Generally, PMI is cancelled after a person's loan reaches an LTV of less than 80 percent.
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