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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