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 the down payment is less than 20 percent or loan-to-value ratio - the amount of the loan divided by the value of the home - is greater than 80 percent.

PMI isn't a bad thing at all - it allows buyers to purchase properties with low down payments and still qualify for a mortgage loan. The PMI premium may be handled in various ways - it may be paid monthly as part of the loan payment, financed into the loan or built into the interest rate or "lender paid". The latter options typically provide a lower total monthly payment and greater annual tax savings.

How is PMI calculated?

The PMI premium is based on the loan terms, i.e. loan-to-value ratio, loan type, term of loan, etc. On average, PMI amounts to about one-half of one percent of the mortgage amount annually, according to the Mortgage Bankers Association, and the premium is usually rolled into the monthly loan payment. Monthly or financed PMI is cancelled when LTV requirements are met, subject to satisfactory payment history.

PMI companies also often assist first-time homebuyers by providing homebuyer education and counseling.