How to Calculate Mortgage Insurance

If you’re buying a home and need a mortgage, it’s important to understand how mortgage insurance works. Mortgage insurance is there to protect the lender in case you default on your loan, but it can also add to the cost of your monthly mortgage payments. In this article, we’ll go over what mortgage insurance is, how it’s calculated, and how you can lower your premiums.

What is Mortgage Insurance?

Mortgage insurance is a type of insurance that protects the lender in case you default on your loan. For conventional loans, mortgage insurance is required when you make a down payment of less than 20% of the home’s purchase price. For FHA loans, mortgage insurance is required for the life of the loan.

There are two types of mortgage insurance: Private Mortgage Insurance (PMI) and Mortgage Insurance Premium (MIP). PMI is for conventional loans, while MIP is for FHA loans.

Private Mortgage Insurance (PMI)

PMI is usually required if you make a down payment of less than 20% of the home’s purchase price. The cost of PMI can vary depending on your credit score, the size of your down payment, and the loan-to-value ratio of your loan.

The loan-to-value ratio (LTV) is the amount of your loan compared to the value of your home. For example, if you have a $200,000 loan and your home is worth $250,000, your LTV is 80%.

The cost of PMI is typically between 0.3% and 1.5% of your loan amount per year. So, if you have a $200,000 loan and your PMI rate is 0.5%, you’ll pay $1,000 per year in PMI premiums.

Mortgage Insurance Premium (MIP)

MIP is required for all FHA loans, regardless of the size of your down payment or your credit score. MIP is divided into two parts: an upfront premium and an annual premium.

The upfront premium is 1.75% of your loan amount and is usually added to your loan balance. So, if you have a $200,000 loan, your upfront MIP premium would be $3,500.

The annual premium is calculated based on your loan amount, LTV, and the term of your loan. The annual premium for most FHA loans is 0.85% of your loan amount per year. So, if you have a $200,000 loan, your annual MIP premium would be $1,700 per year.

How to Calculate Mortgage Insurance

The calculation for mortgage insurance can be a bit complicated, but it’s important to understand how it’s calculated so you can estimate your monthly payments accurately. Here’s how to calculate mortgage insurance for both PMI and MIP:

Calculating PMI

To calculate PMI, you’ll need to know your loan amount, your PMI rate, and your loan-to-value ratio (LTV).

Here’s the formula:

PMI = (Loan Amount x PMI Rate) / 12

Let’s say you have a $200,000 loan with a PMI rate of 0.5% and an LTV of 80%. Here’s how you would calculate your PMI premium:

PMI = ($200,000 x 0.5%) / 12	$83.33 per month

So, your PMI premium would be $83.33 per month.

Calculating MIP

To calculate MIP, you’ll need to know your loan amount, your upfront MIP premium, and your annual MIP premium.

Here’s the formula:

MIP = (Loan Amount x Annual MIP Rate) / 12 + Upfront MIP Premium / Loan Term in Months

Let’s say you have a $200,000 loan with an upfront MIP premium of $3,500 and an annual MIP premium of 0.85%. Here’s how you would calculate your MIP premium:

MIP = ($200,000 x 0.85%) / 12 + $3,500 / 360	$165.83 per month

So, your MIP premium would be $165.83 per month.

FAQ

Can you avoid mortgage insurance?

If you make a down payment of at least 20% of the home’s purchase price, you can avoid PMI. However, if you have an FHA loan, you’ll still need to pay MIP regardless of your down payment.

How can you lower your mortgage insurance premiums?

One way to lower your PMI premiums is to improve your credit score. The higher your credit score, the lower your PMI rate will be. For FHA loans, you can refinance to a conventional loan once you have at least 20% equity in your home to eliminate MIP.

Is mortgage insurance tax-deductible?

Yes, mortgage insurance is tax-deductible for qualified borrowers. You can deduct your PMI or MIP premiums on your federal income tax return if you meet certain requirements.

How long do you have to pay mortgage insurance?

If you have a conventional loan with PMI, you can request to have your PMI removed once you have at least 20% equity in your home. For FHA loans, you’ll need to pay MIP for the life of the loan unless you refinance to a conventional loan.

Can you shop around for mortgage insurance?

No, you can’t shop around for mortgage insurance like you can for homeowners insurance. Your lender will choose the mortgage insurance provider and the premiums will be calculated based on your loan amount and other factors.

Conclusion

Mortgage insurance is an important part of the homebuying process, but it can also add to the cost of your monthly mortgage payments. By understanding how mortgage insurance is calculated and how to lower your premiums, you can save money and make more informed decisions when buying a home.