PMI is short for Private Mortgage Insurance. PMI is usually required when you have a conventional loan and make a down payment of less than 20% of the home's purchase price. PMI is beneficial for buyers as it helps them qualify for the mortgage they need and ensures that the lender is insured in the event the purchaser defaults on the loan.
PMI is added to your monthly mortgage payment, and you pay a small amount of the balance every month in addition to your mortgage. If you’re a soon-to-be home owner with a down payment of less than 20%, you need to know how to calculate PMI and how it will affect your mortgage payments.Here's a quick, 6 step way to calculate PMI so that you have an idea of what it will cost you when you meet with a lender:
Step 1: Write down the price of the home. In this example, we will use $200,000.
Step 2: Write down the amount you will put down. We will assume in this example the buyers have a down payment of $10,000.
Step 3: Divide your down payment by the purchase price. This gives you the percent of your down payment. So, in our example, $10,000 divided by $200,000 is .05, or 5%. This scenario would definitely require Private Mortgage Insurance.
Step 4: Subtract the total in Step 3 from 100. In our example, this figure would be 95%. This is your loan-to-value ratio, which you need in order to calculate PMI. Enter the above information into a PMI calculator to get a ballpark idea of your PMI. Specific costs will need to be discussed with your lender but this will help you understand what the additional liability will be.
Step 5: Look into getting pre-qualified for a mortgage and talk to your lender about the length of the loan that is best for your individual needs.
Step 6: Take the yearly cost of PMI, and divide it by 12. This shows you how much the PMI increases your monthly payment.
It’s important to note that PMI isn't forever. Value-added updates to your home or paying your monthly payments over the course of time will bring your loan-to-value ratio to under 80% eventually. PMI payments can then be removed in some cases when the loan to value ratio reaches 80%. An experienced lending professional can offer sound advice as to the best way to proceed. It should be noted that calculating your PMI before laying out financials with a lender is not an exact calculation, but will help you create a more accurate budget.
If you’re ready to pre-qualify for a mortgage, determine what amount of PMI you’ll need and see how it will affect your monthly payments, sign up for a pre-qualification appointment now!