PMI, Down Payments and Mortgage Calculators

As the mortgage market continues down a path of greater restrictions on lending guidelines, the amount of the down payment is a becoming a bigger factor in loan approvals.  The required amount of the down payment will vary based on the type of the loan, the size of the loan and the qualifying factors of the borrower.

Most borrowers utilize the mortgage calculator to calculate the size of the loan they will qualify for.  The most obvious reason for this manner of use for the mortgage calculator is that a majority of borrowers are constrained by the amount of funds they have available for a down payment.  There is little value in having a mortgage calculator ascertain a loan amount and payment amount when the down payment required to obtain those numbers is unattainable.  Private mortgage insurance or PMI provides a safety net to the lender which generally affords a lower down payment need by the borrower. 

PMI stands for private mortgage insurance.  PMI is a contract between the insurance company and the lender.  In the case of a loan default, the lender makes a claim to be paid by the PMI company for the loss.  The amount covered and paid to the lender is based on the contractual agreement between the lender and the PMI company on the foreclosed home.  The claim is paid to the lender.  PMI protects the lender or at least provides partial protection to the lender in case of default and foreclosure.  The borrowers benefit is only at the time of loan approval.  The PMI coverage for the lender allows the lender to accept a lower down payment requirement.  A mortgage calculator used for qualification purposes will automatically factor in the cost of PMI for loan amounts will less than a 20% down payment.

PMI companies insure a percentage of the loan to reduce risk to the lender.  If a borrower has a down payment of 20% or greater there is no need to trigger the PMI costs in the mortgage calculator.  Mortgage loans with more than 20% are considered well secured and do not require the additional security of PMI.  Adjustable rate mortgages generally have PMI rates than fixed rate loans.  Mortgage loans with higher loan to values will have higher PMI premiums.  The loan amount will impact the PMI amount mostly because the PMI premium is calculated based on loan amount.  The PMI rate will not change, just the dollar amount of the insurance.  Ignoring these figures in the mortgage calculator can severely underestimate the cost of a home loan.

The cost of PMI in the mortgage calculator can be increased or decreased depending on the actual costs for different loan requests.  The key factors to determine the cost of PMI are the loan to value for the mortgage requested, the loan term, the loan type and the loan amount.  Since the cost or rate of PMI changes depending on the lender, the PMI company and changes in the market; in order to get accurate rates it is best to speak directly to the bank or lender.  It may take more than one phone call to find a knowledgeable loan officer that determine the actual PMI costs that the borrower should use in the mortgage calculator.

Tags: adjustable rate mortgage, down payment, home loan, mortgage, mortgage calculator, pmi

This entry was posted on Saturday, December 6th, 2008 at 4:43 pm and is filed under Mortgage Articles. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.