Alabama Real Estate Practice Exam 2026 – All-in-One Guide to Master Your Real Estate License!

The mortgage insurance premium (PMI) is typically calculated as a percentage of the loan amount, and the exact percentage can vary depending on the type of loan, the lender, and the borrower's credit profile. A common PMI fee is about 0.5% to 1% of the loan amount annually, but it may be higher in certain situations.

In this case, selecting 2.25% as the mortgage insurance premium may reflect a specific scenario or lender guideline that is not uncommon, especially for certain types of loans or for borrowers with lower down payments. Mortgage insurance is required when a borrower does not have a 20% down payment on conventional loans, and the risk of default is higher. The percentage may also be influenced by factors like the length of the loan, the borrower's credit score, or the specific loan program being utilized.

Understanding how PMI works and its implications on monthly payments is crucial for borrowers when budgeting for a home purchase. It protects the lender in case of borrower default and is typically added to monthly mortgage payments. Therefore, 2.25% can be seen as a realistic figure for PMI based on these variables.