Question:

What are the factors that affect PMI (Private Mortgage Insurance) calculation?

Answer:

PMI (Private Mortgage Insurance) calculation is affected by the following factors:

Type of loan:

The type of loan you have qualified for plays a big role in determining your PMI cost. If you have a conventional fixed rate loan then PMI costs the least. For other loan types such as buy downs and ARMs, PMI increases significantly.

Therefore, when you are making a selection of what kind of mortgage you are going to get, you should consider the cost of PMI.

Amount of Down Payment:

The amount of down payment you make calculate your Loan to Value (LTV) ratio and your LTV is a major factor in calculation of your PMI. The bigger the down payment, the lesser the PMI cost.

It is important to note here that PMI is not required by lenders if you have an LTV of less than 80%, i.e. if you make a down payment of more than 20% of the mortgage. If you have enough cash available when buying a mortgage and you are looking to invest it elsewhere, this might be a good use for that excess cash.

Payback Period of the Loan:

The payback period of the loan helps determine the risk factor on a loan. As insurance cost basically covers the probability of a risk materializing; the smaller the mortgage payback period, the lesser the risk on investment and the lesser the cost of PMI.

It is usually not possible for homeowners to sign up for a mortgage agreement lasting less than 15 years. That is why the 15 year period has the least risk and hence least cost attached to it.

Nature of the Market:

Like any other product, PMI rates are affected by market conditions. If the buying is slow, the rates might go down and vice versa. Also, different lenders have different ways of coming up with a value of PMI for a particular loan because there is no one standard formula for everyone.

So if one is willing to invest some time and shop for PMI extensively, one might get a better deal than most.

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