Private Mortgage Insurance

Private mortgage insurance or PMI is required when the loan-to-value or LTV of any conventional mortgage exceeds 80 percent. Such mortgage insurance protects the bank from losses in case the borrower defaults. PMI is calculated as a percentage of the mortgage.

Private mortgage insurance - why it is bad

The problem with a regular private mortgage insurance is that the money is a waste. It is not tax deductible unlike the interest you pay on a mortgage. Recently many banks introduced what is called Lender Paid Mortgage Insurance or LPMI which is tax-deductible.

Most commonly PMI is paid monthly as a part of the mortgage payment. Check out all the types of payment plans.

Please NOTE that PMI is now tax deductible for all borrowers who bought or refinanced using PMI on or after January 1, 2007 and who have Adjusted Gross Income below the $100,000 threshold or $50,000 if you are married and filing separately. See Is PMI tax deductible for more information.

Private mortgage insurance and loan-to-value - the numbers game

LTV is simply a ratio between your mortgage or loan balance and fair market value of your house.

Let's say you are buying a house for $150,000. Until recently, you had to put 20% as a down payment in order to get loan-to-value of 80% and not to have PMI. Now there are several different ways to escape paying private mortgage insurance even if you put less than 20% down. Check other no "mortgage insurance" options.

Here is another scenario - you own your home for a number of years, values have gone up and your home equity is 60 percent meaning your LTV is only 40 percent.  You never paid PMI. Actually you don't even know what private mortgage insurance is.  Suddenly you decided to do cash-out refinance on your house. You need to make sure that your LTV for a new loan will not go over 80%. If it does, you will be paying PMI.

So if your home is worth $200,000 and your mortgage balance is $100,000, your LTV is 50%. The highest amount of money that you can cash out from this home without incurring PMI is $60,000.  Your new loan will be $160,000 and LTV will be 80%.

Private mortgage insurance rate

The actual dollars you will waste on PMI depend on the insurance plan selected, loan amount, amount of coverage and loan-to-value ratio.

As noted above, PMI is calculated as a percentage of the mortgage. Here are the private mortgage insurance rates from our experience that most banks are likely to charge you:

If LTV is 97%, PMI is .92% of the mortgage amount.

If LTV is 95%, PMI is .78% of the mortgage amount.

If LTV is 90%, PMI is .52% of the mortgage amount.

If LTV is 85%, PMI is .32% of the mortgage amount.

So if you take $80,000 out of the $200,000 home that previously had $100,000 mortgage (see example above), your new loan will be $180,000 and new LTV will be 90%. Monthly paid private mortgage insurance will be calculated as

 .0052 times $180,000 divided by 12 months which is equal to $78.

You are paying an extra $78 that are completely wasted.

See home mortgage insurance cancellation

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