Should You Avoid Personal Mortgage Insurance

One common thing about mortgages that many people don’t understand is Personal Mortgage Insurance as it is often called although the proper name for it is private mortgage insurance, abbreviated PMI. So, what is personal mortgage insurance and is it something that you will be required to get on your home loan?  This is an easy question to answer, and it’s almost as easy to calculate about how much you will have to pay for the mortgage insurance premium. Let’s explore what this type of insurance is and how you can prepare for it as you look for a mortgage loan that is right for you.

Private mortgage insurance is insurance that is paid for by you – the buyer – but that pays the lender in case you default on the mortgage. It is required when you pay less than 20 percent down on the home. So for instance, on a $250,000 loan you would have to put $50,000 down to avoid paying PMI. How it generally works is that you will have to pay the first year upfront at closing and then insurance premium is paid monthly as part of your mortgage payment. It’s important to try to avoid this insurance if possible because it can add quite a bit to your mortgage payment.

You can stop paying your mortgage insurance once your home equity reaches twenty percent. You can get the equity to twenty percent by continuing to make payments until it has reached that level, and at that point you can discontinue the insurance. If you do have to carry PMI you’ll want to figure out your personal mortgage insurance rates and to do that you’re going to need a copy of your lender’s rate chart, the amount of the loan, and how much that you are planning to put down on the home. Then you can use a personal mortgage insurance calculator to figure it out, or simply do the math manually.

Suppose that you are buying a home for $300,000 and you can only afford to put 10 percent down, which is thirty thousand dollars. That leaves the loan amount at $270,000 and that is what you will calculate your PMI payment from. If you don’t have a lender’s chart then simply use the amount here as a guide line on your own mortgage insurance calculation, using the amount of your loan and how much you are paying down. Let’s use the number ½ a percent for this example. The first step is to calculate what percentage of $270,000 is ½ a percent of 0.5%.

Multiply 270,000 by .005 and you come up with $1350.  This is the annual premium that you will have to pay for mortgage insurance and you probably will have to pay up front at closing. The next year, the monthly payment will be added to your mortgage payment, which is $112. So one hundred and twelve dollars on top of whatever you were paying as a mortgage payment. This is why you should avoid PMI if you can. Talk to your lender and ask about a split loan or other options to avoid having to pay a PMI payment.