Private Mortgage Insurance helps you get the loan

Private Mortgage Insurance, also known as PMI, is a supplemental insurance policy you may be required to obtain in order to get a mortgage loan. PMI is provided by private (nongovernment) companies and is usually required when your loan-to-value ratio — the amount of your mortgage loan divided by the value of your home — is greater than 80 percent.

PMI isn't a bad thing — it allows you to make a lower down payment and still qualify for a mortgage loan. In fact without PMI, many of us would not be able to purchase our first home.

How is PMI calculated?

Your PMI premium is fixed based on plan type (loan-to-value ratio, loan type, loan term, etc.) and is not related to your particular credit history or other individual characteristics. PMI typically amounts to about one-half of one percent of your mortgage amount annually, according to the Mortgage Bankers Association, and the premium payment is usually rolled into your monthly mortgage payment.  On a $200,000 mortgage, you may be paying $1,000 per year for PMI.

It is important to note that until 2007, PMI was not tax deductable. It is generally a tax deduction for families making less than $110,000 yearly income.  The entire concept of 80/20 financing was to escape PMI for this very reason, since interest was tax deductible. With this change, PMI is now an excellent tool to get into a house. You may occasionally run up against people who are not aware of this change and have very negative attitudes against PMI. If you are unsure, have your loan officer show you some comparisons with the other products available to you.

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