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Calculating PMI
Private mortgage insurance (PMI) is a type of insurance that protects the lender in the event that the borrower defaults on the loan. PMI is typically required when a borrower puts down less than 20% of the purchase price of a home. The amount of PMI required will vary depending on the size of the loan and the amount of the down payment.
To calculate PMI, the lender will take the loan amount and divide it by the purchase price of the home. This will give them the loan-to-value ratio (LTV). The LTV is then used to determine the PMI rate. The higher the LTV, the higher the PMI rate.
Cost of PMI
The cost of PMI will vary based on the size of the loan, the down payment, and the PMI rate. For example, on a $300,000 loan with a 20% down payment, the PMI rate would be 0.78%. This means that the PMI would be $2,340 per year, or $195 per month.
For a loan with a smaller down payment, the PMI rate would be higher. For example, on a $300,000 loan with a 10% down payment, the PMI rate would be 1.11%. This means that the PMI would be $3,330 per year, or $277 per month.
The cost of PMI can also be affected by the type of loan. For example, a conventional loan typically requires PMI, while an FHA loan does not. The cost of PMI on an FHA loan is typically much lower than on a conventional loan.
In some cases, PMI can be cancelled once the loan-to-value ratio reaches 78%. This means that the borrower has paid off enough of the loan that the lender is no longer at risk. The borrower must contact their lender to request that the PMI be cancelled.
It is important to note that PMI is not tax-deductible. The only way to deduct PMI is if the loan was taken out before January 1, 2007 and the borrower itemizes their deductions.
Conclusion
Private mortgage insurance is a type of insurance that protects the lender in the event that the borrower defaults on the loan. The cost of PMI will vary based on the size of the loan, the down payment, and the PMI rate. For a $300,000 loan with a 20% down payment, the PMI rate would be 0.78%, or $2,340 per year. PMI can be cancelled once the loan-to-value ratio reaches 78%.