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 (non-government) 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.
Mortgage Insurance for FHA
Mortgage Insurance for FHA is calculated a little differently. FHA breaks it up. The monthly premium is lower because FHA requires the borrower to pay a lump sum as well when they receive the loan. usually the monthly is .85% per month and the up front is 1.75% of the loan amount. The good part about FHA is that they realize many borrowers are strapped for cash so that allow the borrower to finance the lump sum. In other words if a borrower is borrowing $100,000 and the mortgage insurance is $1500, FHA will let the borrower borrow $101,500.