Calculating Mortgage Insurance
Find the purchase price. Even if you are just beginning to look for a home, you probably already have a good idea about the price of the home you can afford to purchase. The purchase price of the home will help you determine your loan-to-value ratio.
Determine the loan-to-value (LTV) ratio. The loan-to-value ratio is a simple way for lenders and insurance agents to calculate how much you've paid and how much you owe. The LTV ratio is calculated by taking the amount of money you borrowed on the loan and dividing it by the value of your property. The higher the LTV, the more your mortgage insurance will cost. For the purposes of this article, let's assume a loan amount of $225,000. Say you're buying a house that costs $250,000 and you've put 10% down on the house, or $25,000. Because you've only paid 10%, and 90% is still outstanding, your loan is $225,000 and your loan-to-value ratio is 90 percent.
Determine the terms of the loan. The type and length of your loan can also play a factor in the mortgage insurance amount. Shorter loans require lower rates of the mortgage insurance. However, a 30 year loan is the most popular time period. Similarly, fixed loans cost less than adjustable-rate loans. If you have a Federal Housing Association (FHA) loan, you will have a type of insurance called Mortgage Insurance Premium (MIP) instead of PMI. This is still a type of mortgage insurance, but the structure of the loan is slightly different. Be sure to read the terms of the loan carefully to understand how MIP might be calculated for you.
Determine the mortgage insurance rate. PMI fees vary, depending on the size of the down payment and the loan, from around 0.3 percent to 1.15 percent of the original loan amount per year. The easiest way to determine the rate is to use a table on a lender's website. If you are already working with a lender, you can use the one on your lender's website. If you do not yet have a lender, you can still find a calculator online to estimate the rate. One such calculator can be found at mgic.com/ratefinder.
Do the math. The good news is that calculating mortgage insurance is easy. After you know the numbers, all you need to do is multiply and divide to determine the amount of mortgage insurance. First, determine the annual mortgage insurance amount. Do this by multiplying the loan amount by the mortgage insurance rate. Here, if the remaining value of your loan was $225,000 and the mortgage insurance rate was .0052 (or .52%) then: $225,000 x .0052 = $1170. Your annual mortgage insurance payment would be $1170. To determine the monthly payment amount, divide the annual payment by 12: $1170 / 12 = $97.50/month. You can add your monthly mortgage insurance amount to your principal, interest, taxes, and insurance payment to determine your total monthly house payment.
Navigating Other Factors
Understand that your mortgage insurance will "fall off" if you build up enough equity in your home. You don't need mortgage insurance indefinitely. Once you've built up 20% equity in your home (i.e. your LTV is 80%) you can request to cancel your mortgage insurance. Keep in mind that lenders won't automatically cancel your mortgage insurance until your equity reaches about 22% based on the original appraisal of the home. Don't wait for the lender to cancel the insurance for you. Do it yourself once you reach a 20% equity stake in your home. The lender will need an appraiser or real estate agent to give them a valuation before the insurance can be canceled. If you have an FHA loan, you need to have paid 22% of the mortgage before you can cancel the insurance. You also need to have made five years of monthly payments before it can be removed.
Know that your credit score will also affect your mortgage insurance. Just like your credit score affects your ability to get approval for loans, it also may affect your ability to get good rates on mortgage insurance rates. Those with lower credit scores may not get rates as favorable as those with high credit scores.
Understand that some lenders may waive MI altogether if the buyer agrees to a higher interest rate. Some lenders will allow you to purchase a mortgage without insurance if you agree to pay more interest on the life of the loan. Anywhere from .75 to 1 basis points more is normal, depending on the down payment. This is a tradeoff. Most people will pay more money in the long run, since the interest rate hike applies for the whole mortgage. Again, the mortgage insurance only lasts until the buyer has pumped enough equity into the home. You'll most likely end up paying more if you make this tradeoff. At the same time, this tradeoff does come with one perk. The payments you make on your interest are tax deductible, whereas the payments you make on insurance premiums are not, unless you took out your mortgage after Jan 1, 2007 and your Annual Gross Income (AGI) does not exceed $109,000. If you fit this category, you can reduce your AGI by 12 times your monthly PMI payment. So in these parameters, it is deductible.
Know the difference between prepaid insurance and monthly insurance. Figure out if your lender is asking you to pay one sum, up-front, or will stagger your insurance in monthly premiums. Paying your premiums monthly has the benefit of a smaller initial cost as well, and they are harder to forget. Remember, you should request to cancel your mortgage insurance after you've reached a 20 or 22% equity stake in your home. You may forget to do so if you make an up-front payment.
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