What is PMI? - Financial Services Arizona

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.

President Bush just signed into law a new tax break allowing for PMI (Private Mortgage Insurance) to be tax deductible for homeowners with adjusted gross incomes of less than $110,000.

The impact of this new law has 2 main affects.

The first impact, it is going to make qualifying for a new loan a little easier and affordable. This will have a positive impact on real estate sales and prices because properties for these qualifying borrowers just got a little more affordable. The second affect, there are going to be fewer 2nd Deeds of Trusts applied for on purchase transactions. Subsequently, instead of borrowers doing an 80-10-10 or an 80-15-5 or similar (the first number being the percentage of the 1st Deed of Trust, the second number being the percentage of the 2nd Deed of Trust, the third number being the down payment), the entire loan will now be a first Deed of Trust (larger 1st DOTs) and PMI will cover the risk for the lender. This could have a significant positive or negative impact on different segments in the lending industry. The segment originating or servicing 1st Deeds of Trust will benefit because of larger loan balances but the segment originating or servicing 2nd Deeds of Trust will be hurt because of few new loans.