What is PMI, why is it necessary, and how is it calculated?

PMI is the acronym  for "Private Mortgage Insurance", and is sometimes also referred to as "Primary Mortgage Insurance". It is insurance required by a lender for your home loan when you do not have a  twenty percent downpayment, which is considered a conventional loan. Buyers with less than 20% downpayment who require an 80% or more LTV loan (loan to value ratio) are almost always required to purchase this insurance for the lenders protection against a possible default on your primary mortgage.
 
Lenders typically look at a loan with over 80%  LTV as a riskier investment and  will require a PMI payment from the borrower. It is a special insurance that lenders force higher risk borrowers to pay to protect the interests of a bank in case of default.

A benefit of PMI is that it with this type of insurance, it is possible for you to buy a home with as little as a 3 percent to 5 percent down payment, when otherwise it would not have been possible. This means that you can buy a home sooner without accumulating a larger down payment.

Use the handy chart to the left  to estimate what your monthly PMI payment will be  for your thirty year mortgage loan. Your mortgage broker or banker will give you the actual monthly payment, and this chart is meant to be used as a rough guide.

Comments

[Jennifer]

There is also one time up front MI payment option - that usually is much less expensive than the monthly payments. It is a policy you purchase and pay for at the closing of the loan – the range is 1.125% - 3.35% - this rate will be determined by your credit score and your loan type – ARMS are more expensive than Fixed Rate loans. Be aware (or beware!) if you chose to have lender paid mortgage insurance - your rate will be higher - and your loan will be harder to refinance going forward. Right now, it is very difficult to find a private mortgage insurance company who will insure a loan amount larger than 635,000 in the Fairfield County area – the Insurance Companies are already writing the policy to the October 1 guidelines and expected change in loan amounts in Fairfield County.