Mortgage insurance is an insurance that gives the financial protection to a lender if the borrowers default on home loans. It is commonly required when the Down Payment (DP) of a home is less than 20 percent of loan and monthly insurance premiums are added to buyers’ monthly payments. Can we calculate our monthly mortgage insurance premium? How to calculate and how much is mortgage insurance? You will the answers from the following information.
Actually there are two kinds of method to estimate your monthly mortgage insurance. They are by calculating your mortgage insurance itself and by navigating other factors that relate to mortgage insurance. Well, let’s review one by one to get more understanding.
The steps of calculating amount of monthly mortgage insurance
Today, there is special software that provides an instant way to calculate monthly mortgage insurance. You can use this to estimate your monthly payment for your mortgage insurance. But, it’s easy enough to calculate it manually by following these steps:
- Find first the purchase price
If you are the beginner for looking a new home, you probably have an idea about the price, right? The selected price is that can be afforded to purchase by yourself. This purchase price then will help you to determine your LTV (Loan-to-Value) ratio.
- Determine your LTV ratio.
LTV ratio will be the basic thing for the lender and insurer to estimate and to calculate sum of money you have paid and sum of money you can owe. The ratio is obtained by taking amount of money you’ve borrowed and then the lender divides it by your property/ home value. Higher LTV means higher mortgage insurance cost you must pay out. Here is the illustration: You take a loan on $225,000, for instance, and you have pay out 10 percent of loan for the Down Payment (10%x225,000 = 22,500). Because you have only paid 10 percent for the Down Payment and 90 percent is still remaining, your LTV ratio is 90 percent.
- Determine your terms of loan.
Other factors like the length and type of loan can also affect your monthly mortgage insurance amount. A shorter loan requires lower mortgage insurance rates; and a 30-year-loan is the most favorite term of loan chosen by most borrowers.
- Determine the rate of mortgage insurance.
Private Mortgage Insurance (PMI) varies in cost. It depends on sum of Down Payment and loan you take. It commonly ranges from 0,3 to 1,15 percent of loan per year. There is the easiest method to determine your rate. Just use a table provided on lender’s official website. Another method is by using a calculator online. Now so many calculator online are available and you can use one of them to estimate your mortgage insurance rate.
- Let’s do the math.
You can calculate your mortgage insurance by yourself. First to do is determining your annual mortgage insurance. Just multiply the amount of loan by your mortgage insurance rate. Your loan is $225,000, for instance, and the rate of your mortgage insurance is 0,052/ 52%. Then, do the math: $225,000 x 52% = $1170. This is your annual mortgage insurance amount. Second, to determine monthly mortgage insurance payment, divide your annual mortgage insurance payment by 12 (total number of month in a year). This will be: $1170 : 12 = $97,50 per month. Last, add this monthly mortgage insurance payment to interest principal, insurance payment, and taxes to estimate the total of monthly house payment.
If you want to try the second method (calculating mortgage insurance payments by navigating particular factors), please pay your attention on these important things:
- Remember, your mortgage insurance will fall down if you increase the equity on your property or home. Please figure it out that the lender won’t cancel your mortgage insurance automatically until your equity touches at least 22%, based on the appraisal of home. If your equity has reached 20%, quick to cancel the insurance. Don’t wait for your lender canceling your insurance.
- Your credit score will affect your mortgage insurance. The borrowers with lower credit scores may not have rate as good as those with higher credit scores.
- Some lenders can waive mortgage insurance if the borrower says ‘agree’ about the higher interest rate. Many lenders will let you to pay out your mortgage without insurance if you do agreement on paying higher interest along loan’s life.
Understand to distinguish a prepaid and monthly insurance payment