Hopeful home buyers quickly learn multiple phrases they most likely haven’t heard before, and one of those is “PMI”. PMI stands for Private Mortgage Insurance, and it’s an important part of many mortgage transactions. While a standard mortgage usually requires 20% of the value of the mortgage as a down payment, a large number of would-be homeowners just don’t have that kind of money up front. PMI helps get those buyers into a home by insuring the loan with PMI, providing less risk to the lender.

PMI is then added into the monthly mortgage payment and paid until there is 20% equity built into the mortgage. After you reach that point, you can request that your PMI be discontinued, and once there is 22% equity built into the mortgage, PMI is generally terminated automatically by your lender.

If you are shopping for a home but don’t have the full 20% down payment saved, you need to calculate PMI before pursuing a property, as it will be added to your monthly mortgage payment. Making sure you will be able to make your monthly mortgage and PMI payments are critical to your financial stability.

Here is a step-by-step guide to help you accurately calculate PMI on your mortgage.

First, note the price range of homes you are looking for. PMI varies based on the amount of the mortgage, so having a ballpark price is important to calculate PMI correctly.

Then, figure up the amount you will put down. This includes money from savings, gifts from parents, and all other funds that will go toward your down payment.

After you pinpoint both of these figures, determine what percentage of your mortgage that down payment calculates out to. For example, if the home is $150000, and your down payment is $7500, it is a 5% down payment.

The next step is to subtract the down payment percentage from 100. This gives you the amount you will need to borrow.

Next, find a PMI calculator online (there are many free ones available!) and enter this information to see an estimate of your PMI.

This number is the yearly cost of PMI. Divide it by 12 (months), and add that amount to your planned mortgage payment to see the total amount you will spend on the loan and PMI every month.

Keep in mind, once you reach that magical 20% / 22% equity number, you can get “out from under” PMI and your mortgage payment will decrease back to its original amount before the added PMI.

PMI may seem expensive, but it helps get you into the home you want sooner than if you were required to save the whopping 20% down payment. Being able to calculate PMI accurately keeps your budget on track and your expectations in line when searching for your dream home. For more information about the benefits of PMI, calculating PMI and other first time home buyer tips, download our eBook now!