Private mortgage insurance (PMI) is typically required by lenders when a borrower cannot make a down payment of at least 20% of the home’s purchase price. This insurance policy protects the lender from financial loss if the borrower defaults on the loan. In this article, we will discuss the factors that affect PMI and how to calculate it for your mortgage.

Step 1: Determine if you need PMI

First, figure out if you need PMI for your mortgage. If your down payment is less than 20% of the home’s purchase price, you’ll likely need to pay for PMI. For example, if you’re buying a house for $300,000 and have only saved up $40,000 (13.33%) as a down payment, you’ll need private mortgage insurance.

Step 2: Find out the loan-to-value ratio (LTV)

The loan-to-value ratio (LTV) is another critical factor in calculating your PMI cost. To find your LTV, divide your loan amount by the property’s value or purchase price. Using the example above:

Loan Amount: $260,000 ($300,000 – $40,000)

Property Value: $300,000

LTV = Loan Amount / Property Value

LTV = $260,000 / $300,000

LTV = 0.867 or 86.7%

Step 3: Determine the PMI rate

PMI rates vary depending on the lender and your credit score. Generally, higher credit scores result in lower PMI rates. You can either ask your lender their PMI rates based on your credit score or use general market information from resources such as Freddie Mac’s or Fannie Mae’s websites.

For illustration purposes, let’s say that based on our credit score, our annual PMI rate is 0.7%.

Step 4: Calculate the annual PMI cost

To calculate the annual PMI cost, multiply the PMI rate by your loan amount.

Annual PMI Cost = Loan Amount x PMI Rate

Annual PMI Cost = $260,000 x 0.7% (as a decimal: 0.007)

Annual PMI Cost = $1,820

Step 5: Determine your monthly PMI payment

To find out how much you need to pay for PMI each month, divide the annual PMI cost by 12.

Monthly PMI Payment = Annual PMI Cost / 12

Monthly PMI Payment = $1,820 / 12

Monthly PMI Payment = $151.67

Based on these calculations, you would need to pay $151.67 per month for private mortgage insurance. Keep in mind that these rates and calculations are just examples and might be different depending on your specific situation and lender’s requirements. Once you build up to at least 20% equity in your home through paying down your loan balance or if your home value increases, you can request to have your PMI removed, potentially saving you money on your mortgage payments.