Mortgage insurance is an insurance policy which compensates lenders for losses due to default of mortgage loan.
Mortgage insurance depending up on the insurer is of two types; public and private. This policy is known as mortgage indemnity guarantee which is popularly called in UK.
Private mortgage insurance is required when the down payments are below 20%. Rates of mortgage insurance vary from 1.5% to 6% of the principal loan per year based on the loan aspects like percent of the loan insured, Loan to Value, fixed or variable and credit score. In US loan payments by borrower are tax deductible until 2010.
This provides the borrowers to obtain mortgage without having to 20% down payment. This gives the lender added risk of high loan to value mortgage. BPMI can be cancelled earlier by submitting new consideration which shows that the loan balance is less than 80% of the home’s value due to admiration.
This is a feature of loans that does not require Mortgage insurance for high LTV loans.
A person X decides to purchase a house worth $150,000. He pays $15000 which is 10% of the amount in downpayment. He takes $135,000 as mortgage. In this if the person goes to the lender who requires X to pay for the insurance which protects him against default and if 25% of the amount is insured then
25% of 135000 = $33,750
So the lender is exposed to amount $101,250
In this deal, if the borrower defaults then the first of $33750 is covered due to insurance.
To calculate the principal and interest PI = I * A *Y
I = interest of the loan
A= amount of the loan
Y = number of years taken to repay the loan amount
Estimated PMI = PI / (Y *12)
PI = Principal and interest
Y= number of years
Y is multiplied with 12 to calculate the number of months