Private Mortgage Insurance (PMI) is insurance that protects the lender if the borrower defaults on the loan. It is typically required for borrowers who make a down payment of less than 20% of the home's purchase price.
To calculate PMI, use the following formulas:
\[ \text{LTV} = \frac{\text{Mortgage Loan}}{\text{Home Purchase Price}} \times 100 \] \[ \text{PMI} = \text{Mortgage Loan} \times \frac{\text{PMI Rate}}{100} \] \[ \text{Monthly PMI} = \frac{\text{Annual PMI}}{12} \]
Assume you want to purchase a home for $100,000 and you can make a $12,000 down payment. You can calculate your PMI amount as follows:
Step 1 – Determine your loan-to-value ratio:
\[ \text{Mortgage Loan} = \$100,000 - \$12,000 = \$88,000 \] \[ \text{LTV} = \frac{\$88,000}{\$100,000} \times 100 = 88\% \]
Step 2 – Multiply the mortgage loan amount by your specific PMI rate according to the lender's chart. Let's assume your LTV of 88% tallies a PMI of 1.2%:
\[ \text{PMI} = \$88,000 \times \frac{1.2}{100} = \$1,056 \]
Step 3 – Divide annual PMI by 12 to find the monthly PMI amount:
\[ \text{Monthly PMI} = \frac{\$1,056}{12} = \$88 \]
