What is PMI?

Private Mortgage Insurance, known as PMI in the real estate industry, is a supplemental insurance policy available for borrowers who wish to put down less than the minimum required down payment when purchasing or refinancing property. Private mortgage insurance in effect helps you get a loan when you do not otherwise have enough of a cash down payment or enough equity to purchase or refinance a home. PMI policies are provided by private (non-government) companies and are usually required when your loan-to-value ratio (the amount of your mortgage loan divided by the value or of your home) is greater than 80 percent.

PMI is a great tool offering you a means to acquire a property that you otherwise may not be able to obtain due to lack of the necessary down payment. It allows you to make a lower down payment and still qualify for a mortgage loan.

Your PMI premium is calculated based on plan type consisting of loan-to-value ratio, loan type, loan term, etc. along with consideration given to your credit score, debt ratios, etc. The lower your down payment and the lower your credit score the higher your monthly premium may be. As an example, with a 10% down loan request for a borrower with good credit the PMI premium would be $52 per month per $100,000 borrowed. With a decrease in down payment to 5%, the monthly premium increases to approximately $78 per month per $100,000 borrowed. There are lower down payment options as well with higher associated monthly premiums.

For 2007, Congress has passed a PMI bill allowing PMI premiums to be tax deductible for loans taken out in 2007 if your effective gross income is less than $100,000 and then phases out the tax benefit through an effective gross income of $110,000. You can speak with your tax professional for specifics. This tax deduction is not available for loans written prior to 2007 and it has not been determined whether this tax break will carry forward through future years.

There are now alternatives to private mortgage insurance such as obtaining what are called piggy back loans and you can read about the advantages and disadvantages of these products on this site at – “What you need to know about 80/10/10 and 80/20 piggy back loans”.

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