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. PMI is provided by private (non-government) companies and is usually required when your loan-to-value ratio the amount of your mortgage loan divided by the value of your home is greater than 80 percent.
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.
How is PMI calculated?
Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is not related to your particular credit history or other individual characteristics. PMI ranges in amounts from about one-half of one percent to over a percent of your mortgage amount annually, according to the Mortgage Bankers Association, and the premium payment is usually rolled into your monthly mortgage payment.
On a $200,000 mortgage, you may be paying $1,000 – $2,000 per year for PMI.
You may also be required to pay an Up-Front mortgage insurance premium which is financed into your loan.