How to Calculate Mortgage Insurance

Buying a house is a huge investment, and for most people, it is one of the biggest investments they will make. To protect your investment and to ensure that you are able to pay your mortgage in case something happens, you may need to get mortgage insurance. In this article, we will explain what mortgage insurance is, why you might need it, and how to calculate it.

What is Mortgage Insurance?

Mortgage insurance is an insurance policy that protects lenders from losses if the borrower is unable to make their mortgage payments. If you have a down payment of less than 20%, you will most likely be required to get mortgage insurance. This is because lenders see borrowers with less than 20% down payment as high-risk borrowers, as they may not have enough equity in their homes to cover the loan in case of default.

The cost of mortgage insurance varies depending on the amount of the loan and the down payment. Mortgage insurance is typically paid monthly, and it is usually added to your mortgage payment.

Why Might You Need Mortgage Insurance?

If you are unable to make your mortgage payments, the mortgage insurance policy will kick in and pay the lender the remaining balance of the loan. This helps protect the lender from losses and can help prevent them from foreclosing on your home.

Mortgage insurance can also be useful if you have a low down payment, as it can help you qualify for a mortgage that you might not otherwise be able to get.

How to Calculate Mortgage Insurance

The cost of mortgage insurance is generally calculated based on the loan-to-value ratio (LTV) of your home. LTV is calculated by dividing the amount of the loan by the appraised value of the home. For example, if you have a $300,000 loan on a home that is worth $400,000, your LTV is 75%.

The cost of mortgage insurance varies depending on the LTV and the loan amount. The lower your LTV, the lower your mortgage insurance premium will be.

There are a few different types of mortgage insurance, including private mortgage insurance (PMI) and Federal Housing Administration (FHA) mortgage insurance. PMI is typically required for conventional loans, while FHA mortgage insurance is required for FHA loans.

Private Mortgage Insurance (PMI)

Private mortgage insurance (PMI) is required for conventional loans with a down payment of less than 20%. The cost of PMI is typically between 0.3% and 1.5% of the original loan amount per year, depending on the LTV ratio and the loan amount.

To calculate your PMI, you can use an online PMI calculator or you can use this formula:

For example, if you have a $200,000 loan with an LTV of 95%, your PMI premium would be between $2,600 and $3,000 per year.

Federal Housing Administration (FHA) Mortgage Insurance

Federal Housing Administration (FHA) mortgage insurance is required for FHA loans. The cost of FHA mortgage insurance is split into two parts: an upfront premium and an annual premium. The upfront premium is typically 1.75% of the loan amount, while the annual premium is between 0.45% and 1.05% of the loan amount, depending on the LTV ratio and the loan term.

To calculate your FHA mortgage insurance, you can use an online FHA mortgage insurance calculator or you can use this formula:

For example, if you have a $200,000 loan with an LTV of 96.5%, your upfront premium would be $3,500, and your annual premium would be $1,600.

FAQs

Do I need mortgage insurance?

If you have a down payment of less than 20%, you will most likely be required to get mortgage insurance. This is because lenders see borrowers with less than 20% down payment as high-risk borrowers, as they may not have enough equity in their homes to cover the loan in case of default.

Can I cancel my mortgage insurance?

If you have a conventional loan and you have paid down your mortgage to 80% of the home’s original value, you can request that your lender cancel your PMI. If you have an FHA loan, you will need to refinance your loan to remove the FHA mortgage insurance.

Do I have to pay mortgage insurance upfront?

For FHA loans, you will need to pay the upfront premium at closing. For conventional loans, you have the option of paying the PMI premium upfront or rolling it into your monthly mortgage payment.

Can I shop around for mortgage insurance?

Yes, you can shop around for mortgage insurance. Be sure to compare rates and fees from different insurers to find the best deal.

Is mortgage insurance tax-deductible?

PMI was tax-deductible through the end of 2020, but the deduction has not been extended. FHA mortgage insurance is not tax-deductible.

Conclusion

Mortgage insurance can be an important part of your home buying process, particularly if you have a low down payment. Understanding how to calculate your mortgage insurance can help you budget for your monthly mortgage payment and ensure that you are able to protect your investment in case something happens.