James Morgan, Member
When purchasing a home, your down payment must be 20 percent or greater than the appraised value or sale price of the home. If you don’t meet this requirement then the lender is taking an increased risk with your mortgage; therefore, you are required to pay private mortgage insurance (PMI) on your loan.
PMI are fees listed on your mortgage documents. The percentage fee can be found on your original loan documents. You can calculate PMI percentage fee with just your monthly statement. To calculate the exact percentage fee of your loan, you take the PMI required per month and multiply it by 12. Next, divide the original loan amount by the PMI required per year. The resulting amount should be between 0.30 percent and 1.15 percent.
The less you borrow from the bank the less PMI fees you will owe. If you borrow 95% of the value of the home, you owe more in fees than borrowing 85% of the value of the home.
If you are concerned about paying a high fee each month for PMI, then you will be happy to know that it doesn’t last for the life of the loan. Mortgage companies may no longer charge you PMI fees once your loan-to-value ratio reaches 78%. For example, with a 30 year loan at 4% the PMI will be removed around the 5 year mark with normal monthly payments.
Remember, the PMI fees you pay are tax deductible through 2013. Congress could extend this for 2014, and beyond, so watch this for the coming tax year.
Miranda Marquit, Member
When you buy a home with the help of a mortgage, there is a good chance that you will need to purchase mortgage insurance. Realize, though, that private mortgage insurance (PMI) is designed to protect a lender in case a borrower defaults on their payments. PMI mortgage insurance is designed for those who borrow more than 80% of the home price (less than 20% down).
When you borrow, the lender will use a formula to determine how much you will pay. Normally, the calculation is based on the length of mortgage that you have, as well as how much, in terms of loan-to-value ratio, you are borrowing. A normal range for mortgage insurance is a rate somewhere between 0.30% and 0.80% of the total borrowed.
The more you put down for a payment, the lower your PMI mortgage insurance rate will be. For example, someone who is borrowing 85% of the home’s price might pay a mortgage insurance rate of .32%, while someone borrowing 95% of the home’s value might pay .78%.
To figure out how much in private mortgage insurance you will pay each year, you can multiply your rate by how much your loan is for. If you are buying a home for $200,000, and you put 5% down, your LTV will be 95% (you are borrowing 95% of the home’s price. Your down payment would be $10,000 and your loan would be for $190,000. Multiply that $190,000 by .0078, and you will see that your yearly mortgage insurance payment is $1,497.60. Divide that number by 12, and you see a monthly payment of $124.80.
It’s worth noting that once your loan-to-value ratio drops below 80%, you no longer have to pay mortgage insurance. When you reach 78% loan-to-value ratio, the lender is required cancel your PMI automatically. Also, pay attention to your balance to avoid paying private mortgage insurance unnecessarily.
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