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Understanding Private Mortgage Insurance

By Colleen Colkitt

What is PMI?

PMI, or Private Mortgage Insurance, is used to protect lenders from financial offset loss when borrowers are not able to repay their loan. Many lenders use this PMI protection on loans with loan-to-loan value (LTV) with percentages in excess of 80%. This way, the borrower can make a smaller down payment of only about 3%, as opposed to 20%. This type of loan sometimes requires a premium initial payment and also a monthly fee, dependant on the structure of the particular loan. The rates vary, depending on the size of the loan and mortgage, but general fees are close to $55/mo. Per $100,000 financed. The higher end of these typical fees is $125/mo. for a loan of $200,000.

On the borrower side of things, keeping track of your payments is important because you should notify your lender once you reach 80%. The PMI premiums should be discontinued at this point, or even by 78%. By law, lenders are required to have their borrowers pay PMI premiums all the way to 50% equity on certain high-risk loans. A high-risk loan might be for borrowers with less proof of income, or those with poor credit scores. As of 2013, mortgage insurance premiums are now tax deductible.

Apply PMI

Sometimes it's hard to understand how the rates and percentages work without applying it to a concrete example. A realistic example of how this would work, would include a borrower looking to buy a property at $190,000. The borrower makes a %10 down payment, which means they would borrow $171,000, and the mortgage insurer will charge you an annual premium of %0.49. Next, the insurer or lender, multiplies the loan by %.0049, making an annual premium payment of $837.90. To make things easier on the borrower, dividing this into monthly payments would make it a fee of about $69.83 a month.

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