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When you’re in the process of getting approved by your mortgage lender and decided to make a down payment that is less than the traditional 20 percent, it is more than likely that you will be required to pay a mortgage insurance premium (MIP), which is also known as private mortgage insurance (PMI). The private mortgage insurance is to provide financial protection for the mortgage lender just in case the borrower defaults on their loan.

And if the debtor indeed is unable to meet their financial obligations to make timely payments on their loan, the mortgage lender will start charging the borrower a mortgage insurance payment every month. The requested monthly mortgage insurance payment is to allow the lender to recoup some of the money that were invested and lost in the process of reselling the house.

If you were asked to pay for private mortgage insurance because you were unable to provide the traditional 20 percent down payments upfront, you will notice that there are several ways to make such payment. However, a few of these payment methods are rarely used because they are considered old and unconventional.

Most private mortgage insurance policies that are use today involve monthly premium rates. To determine how much the private mortgage insurance will cost you on the monthly basis, a specific monthly premium rates must be multiplied by the loan balance and then divided by 1200. For example, if the monthly premium rate is 0.92 and the loan balance is $200,000, then the monthly premium will be $184,000 divided by 1200, which equals to $153.33.

Alternatively, the debtor can also choose the finance upfront premium instead of the monthly premium plan. The finance upfront premium will be factor in with the entire amount of loan that is borrowed. Keep in mind that private mortgage insurance is tax deductible through 2010. But, due to the recent downturn of the housing economy, it is very hard to predict if mortgage insurance premium wills still qualify as tax deductible in the near future.

If the borrower did decide to go with the financed upfront premium plan then they are free from the obligation of making payments for private mortgage insurance every month. But the drawback of using this type of premium plan is that the debtor will eventually pay higher loan balance once the entire loan has been paid for.

Many years ago the financed upfront premium plan was a very attractive alternative over the monthly private mortgage insurance simply because the lender offered partial refund on this type premium. The way this work is that 90 percent of the premium payment is refunded on the first year and similar amount is returned up to the fifth year. The refunds gradually decrease to 50 percent after the 6th year, and finally to zero percent after 12 years of paying this particular annual premium plan.

Since majority of the loan brokers and lenders don’t offer the financed upfront premium, only a few borrowers are aware of such premium plans. Additionally, major mortgage lender companies mandate any loan brokers to acquire special authorization if they decided to utilize the upfront premium program on loans that are sold to their company. But, since only a few customers are aware of the finance upfront premium plan and due to the notion of inconvenience when acquiring special authorization for such program, most private mortgage insurance providers prefer to avoid it all together. Thus, nearly all loan borrowers who could not pay the traditional 20 percent upfront for their loans will generally settle for the private mortgage insurance in which they have to pay on the monthly basis until all their loans have been paid for.