If you’re thinking about buying a home but plan on putting less than 20 percent down, you may be required to purchase private mortgage insurance (PMI). The banks use PMI as a safeguard in cases where homeowners default on their loan. Should you default on your mortgage, the bank has recourse through the insurance company to get its money back.

Whether you purchase an old or new home, you’ll need to assess the value of the home. To assess a home’s value, banks typically hire an appraiser to ensure that they lend a comparable amount of money for what the home is actually worth.

Let’s say, for example, that you plan to purchase a home for $200,000. The bank sends out an appraiser to the home, and determines the home is actually worth the $200,000, which is the asking price from the seller. As the buyer, you have $20,000 (or 10 percent) for a down payment on the home. In order to avoid paying the PMI, you would need to put $40,000 down on the home (or 20 percent). In this case, the Loan to Value Ratio (LTV) is 90. You’ll also need additional money for closing fees.

The following steps also explain how to calculate a monthly PMI payment without the use of a Pmi mortgage calculator:

1. For the above example, let’s assume that the PMI is a half percent, or .005 (PMI rates vary from lender to lender).

2. Multiply the loan amount by the PMI rate as follows:

Loan Amount x PMI Rate = Yearly PMI Payment

or

$180,000 x .005 = $900

Divide the yearly PMI payment by 12 to determine the monthly payment.

$900 / 12 = $75

In the example, the monthly PMI payment is $75

A Pmi mortgage calculator can also be used to determine your monthly PMI payment. Many of them are available on the Internet.