Private mortgage insurance, while an extra expense, protects the lender while allowing you to purchase a home with a down payment you can afford. Lenders typically require a down payment of at least 20 percent of the purchase price if you want to avoid mortgage insurers. However, lenders do offer products that allow you to put as little as 3 percent down, if you buy mortgage insurance. On a $300,000 mortgage, this represents a difference between a $60,000 down payment and a $9,000 one, which can make all the difference for a young couple looking to strike out on their own. You just need to calculate your monthly premium to make sure you can afford it.
Ask your mortgage lender to provide you with a schedule of PMI rates. These are set by the PMI provider and vary based on individual companies. The rates also assume your loan conforms to the lender's requirements.
Determine your loan-to-value ratio. First, subtract the down payment from the purchase price. If you are putting $9,000 down on a $300,000 property, that leaves you with a $291,000 mortgage. Divide 291,000 by 300,000 to find that your LTV is .97, or 97%.
Compare your LTV to the rate schedule provided by the lender. For example, the rate on a mortgage with a 95.01 to 97 percent LTV may be .90 percent. The lower your LTV, the lower the mortgage insurance rate.
Multiply the amount of the mortgage by the PMI rate. If your $291,000 mortgage has a PMI rate of .90, the yearly mortgage insurance premium is $2,619.
Divide the yearly mortgage insurance premium by 12. If your yearly PMI is $2,619, you will pay $218.25 per month. You are required to pay this as part of the escrow on your monthly payment along with your taxes and homeowners insurance.
- You can eliminate PMI when your LTV drops below 80%. You can speed up the process by paying additional principal whenever you have the opportunity.
Carl Carabelli has been writing in various capacities for more than 15 years. He has utilized his creative writing skills to enhance his other ventures such as financial analysis, copywriting and contributing various articles and opinion pieces. Carabelli earned a bachelor's degree in communications from Seton Hall and has worked in banking, notably commercial lending, since 2001.