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Understanding Private Mortgage Insurance (PMI) and Its Calculation
Private Mortgage Insurance (PMI) is a type of insurance that lenders require borrowers to purchase when they put down less than 20% of the purchase price of a home. This insurance protects the lender in case the borrower defaults on the loan. In this article, we will explore how to calculate the monthly PMI payment for a borrower who is purchasing a home with a 15-year mortgage and making a 15% down payment.
Calculating the Down Payment and Loan Amount
To calculate the monthly PMI payment, we first need to determine the down payment and the loan amount. Emil is purchasing a $175,000 home and will make a 15% down payment. To calculate the down payment, we multiply the purchase price by the down payment percentage:
Next, we calculate the loan amount by subtracting the down payment from the purchase price:
Understanding the PMI Table
The table below provides the PMI rates for different loan-to-value (LTV) ratios. The LTV ratio is calculated by dividing the loan amount by the purchase price:
| LTV Ratio | PMI Rate |
|---|---|
| 80% | 0.35% |
| 85% | 0.40% |
| 90% | 0.45% |
| 95% | 0.50% |
Since Emil's loan amount is $148,750 and the purchase price is $175,000, the LTV ratio is:
Calculating the Monthly PMI Payment
Using the LTV ratio of 0.85, we can find the PMI rate from the table:
| LTV Ratio | PMI Rate |
|---|---|
| 80% | 0.35% |
| 85% | 0.40% |
| 90% | 0.45% |
| 95% | 0.50% |
The PMI rate for an LTV ratio of 0.85 is 0.40%. To calculate the monthly PMI payment, we multiply the loan amount by the PMI rate and divide by 12:
Therefore, Emil's monthly PMI payment is $49.50.
Conclusion
In this article, we calculated the monthly PMI payment for a borrower who is purchasing a home with a 15-year mortgage and making a 15% down payment. We first calculated the down payment and loan amount, then used the LTV ratio to find the PMI rate from the table. Finally, we calculated the monthly PMI payment by multiplying the loan amount by the PMI rate and dividing by 12. The result was a monthly PMI payment of $49.50.
Private Mortgage Insurance (PMI) Q&A
In our previous article, we explored how to calculate the monthly PMI payment for a borrower who is purchasing a home with a 15-year mortgage and making a 15% down payment. In this article, we will answer some frequently asked questions about PMI to help you better understand this type of insurance.
Q: What is Private Mortgage Insurance (PMI)?
A: Private Mortgage Insurance (PMI) is a type of insurance that lenders require borrowers to purchase when they put down less than 20% of the purchase price of a home. This insurance protects the lender in case the borrower defaults on the loan.
Q: Why do lenders require PMI?
A: Lenders require PMI to protect themselves from the risk of default. When a borrower puts down less than 20% of the purchase price, the lender is taking on more risk. PMI helps to mitigate this risk by providing a financial safety net for the lender in case the borrower defaults on the loan.
Q: How is PMI calculated?
A: PMI is calculated based on the loan-to-value (LTV) ratio, which is the ratio of the loan amount to the purchase price of the home. The LTV ratio is used to determine the PMI rate, which is a percentage of the loan amount.
Q: What is the typical PMI rate?
A: The typical PMI rate ranges from 0.3% to 1.5% of the loan amount, depending on the LTV ratio. For example, if the LTV ratio is 80%, the PMI rate might be 0.35%.
Q: How long do I have to pay PMI?
A: The length of time you have to pay PMI varies depending on the lender and the loan terms. Typically, PMI is required for the life of the loan, but some lenders may allow you to cancel PMI after a certain period of time, such as 20% equity in the home.
Q: Can I cancel PMI?
A: Yes, you can cancel PMI, but you will need to meet certain requirements, such as:
- Paying down the loan to 80% or less of the original purchase price
- Building 20% or more equity in the home
- Requesting cancellation from the lender
Q: How much does PMI cost?
A: The cost of PMI varies depending on the lender and the loan terms. Typically, PMI costs between 0.3% and 1.5% of the loan amount per year.
Q: Can I avoid PMI?
A: Yes, you can avoid PMI by making a down payment of 20% or more of the purchase price of the home. This will eliminate the need for PMI and reduce your monthly mortgage payment.
Q: What are the benefits of PMI?
A: The benefits of PMI include:
- Lower monthly mortgage payments
- Increased purchasing power
- Ability to qualify for a larger loan amount
- Protection for the lender in case of default
Q: What are the drawbacks of PMI?
A: The drawbacks of PMI include:
- Additional cost to the borrower
- Requirement to pay PMI for the life of the loan
- Potential for PMI to increase the cost of the loan
Conclusion
In this article, we answered some frequently asked questions about Private Mortgage Insurance (PMI) to help you better understand this type of insurance. We covered topics such as the definition of PMI, why lenders require it, how it is calculated, and how long you have to pay it. We also discussed the benefits and drawbacks of PMI and how you can avoid it by making a down payment of 20% or more.