PMI, or Private Mortgage Insurance, is an insurance that protects the lender against loss if a borrower stops making payments. Usually a borrower can avoid paying PMI if he/she makes a down payment of 20% or more when buying a home. The 20% equity basically acts as collateral. If the home owner defaults on the loan, he/she looses all of the equity.

When making a down payment of less than 20% most conventional mortgage lenders require private mortgage insurance (PMI). This insurance protects the lender in the event of a foreclosure where the home sells for less than the outstanding mortgage. There are several companies which offer PMI and most lenders obtain coverage from one or more of these companies.Private mortgage insurance is applicable only to those home buyers who seek mortgage financing for a major part of the value of their property. Typically, if a person is paying no down payment at all, or paying something as low as 5% of the total property cost, then the lenders would insist that the borrower buy a private mortgage insurance. As the amount of the down payment increases, the need of a private mortgage insurance would become less and less. People who make 20% of the down payment may not have to buy the private mortgage insurance at all, but that depends on the discretion of the lender.

The calculation for the amount you will pay for the insurance payment is quite simple to understand. Annually it is 0.5% of the amount of the mortgage you have obtained. A property is of the value $500,000. The home buyer pays $100,000 as down payment. Now he or she will be liable to seek a private mortgage insurance for the balance amount, that is $400,000. This is the value the lender has financed. So how much does the annual payment come out to? It is 0.5% of $400,000, which is $2000, which will be further divided into 12 monthly payments.Private Mortgage Insurance premiums vary depending upon the amount of the down payment. The greater the down payment, the less the premium. Typically, the monthly cost is from 0.5% to 1.0% of the loan amount. As an example: Borrower makes a 10% down payment on a $300,000 home which is $30,000. The lender multiplies the 90% loan ($270,000) times 0.005 making the annual cost $1,350. Divided by 12 months, the amount added to the mortgage payment would be $112.50. That is a stiff amount, but if you cannot make the necessary 20% down payment, it permits the loan to happen providing of course that you get approved for the loan.

In much the same way as the example, private mortgage insurance has helped millions of young couples buy their first home without requiring a big down payment. Mortgage lenders are willing to accept such terms because most of the risk of defaulting on the mortgage loan has been diversified away to another party. It proves beneficial to home buyers because it helps them move into a home faster by eliminating the need for a bigger down payment.It is important to note that in some cases, lenders are permitted to require PMI down to a 50% equity for high-risk borrowers particularly when the borrower provides little proof of income and other information during the loan approval process. Also, some FHA loans require PMI premiums throughout the entire term of the mortgage loan. When applying for a mortgage, ask the lender to clarify its position on PMI based upon your particular credit rating and type of loan.

If you are unable to pay the initial down payment of 20% then most likely you will be required to pay for Private Mortgage Insurance. Private Mortgage Insurance will allow you to get a loan without a down payment but will add up to much higher losses on the investment of the house over the course of a couple of years.The cost of PMI mortgage insurance varies according to the percent down payment and home loan mortgage, but it typically equals approximately one half of one percent of the total amount of the loan. But how exactly is private mortgage insurance calculated.

There are lenders who offer No PMI loans with 10% down, but do your financial calculations. Some lenders may "self insure" the loan and charge you a higher rate of interest. Other lenders will offer a conventional mortgage up to 75% of the purchase price along with a 15 Year Fixed Home Equity loan for the remaining 15%. While either option offers you a tax benefit on the increased mortgage interest you will pay, your monthly expense may be higher and the opportunity to refinance the loan if rates drop may be limited. Talking with a financial planner or accountant is your best option when considering these types of loans and you will need to make some assumptions on your future housing plans. Paying $50 more a month to save $25 in taxes just doesn't make sense.Private mortgage insurance or "PMI" policies are designed to reimburse a mortgage lender up to a certain amount if you default on your loan and your house isn't worth enough to entirely repay the lender through a foreclosure sale. Most lenders require PMI on loans where the borrower makes a down payment of less than 20%.

Although PMI increases mortgage payments, they are an advantage for many families that otherwise could not afford a sizable down payment on a home. However, take the reasonable necessary steps to try and avoid paying the extra cost. Also, track your payments and keep an eye on market value increases so you know when to request cancellation of Private Mortgage Insurance.In 1999, a new law, the Homeowner's Protection Act, was passed that requires lenders to notify you, the home owner, how many months and years it will take for you to pay the 20 percent of your principal. But, it is still a good idea you as a home owner to keep track of the mortgage payments on your own.

The decision on when to cancel the private insurance coverage does not depend solely on the degree of your equity in the home. The final say on terminating a private mortgage-insurance policy is reserved jointly for the lender and any investor who may have purchased an interest in the mortgage. However, in most cases, the lender will allow cancellation of mortgage insurance when the loan is paid down to 78% of the original property value. Some lenders may require that you pay PMI for one or two years before you may apply to remove it.To cancel the PMI on your loan, contact your lender. In most cases, an appraisal will be required to determine the value of your property. You will probably also be required to pay for the cost of this appraisal. Another way of cancelling the PMI on your loan is to refinance and to get a new loan without PMI.