How to Calculate FHA Mortgage Insurance

If you're interested in becoming a homeowner, it's important to understand some of the lesser known characteristics of mortgages in the US. One of these is mortgage insurance. Essentially, this insurance does not protect you, but the lender itself against foreclosure. While it's not beneficial to you, it is often required. Knowing how much you'll need to spend is critical is determining your housing budget.

Instructions

1. Understand how the FHA mortgage insurance formula works. The insurance payment and subsequent premiums are based on a sliding percentage scale, so obviously, the larger the loan amount, the greater the premium and up-front payment will be.

2. Determine the down payment you'll be placing on the home. In most cases, and in most states, when you buy a house, you'll need to put down money to secure the property, and a 1.50% mortgage insurance charge will be based upon the sale price. For example, if you buy your home for $275,000, your up-front mortgage insurance payment will be $4,125. Often this amount can be financed into the total principal balance of the loan.

3. Determine your monthly premium. If you've placed more than 1% down on your home but less than 10%, your monthly premium will be .50% each year. Again, using the example above, if you put down 7% on your home, your annual mortgage insurance premium will be $1375. Then, divide this amount by twelve to get your monthly cost--an amount which will generally be rolled into your monthly payment. In this case, it is $114.58.

4. Establish a budget to ensure these payments are manageable. If you can only afford a principal and interest payment on a $275,000 loan, you'll begin feeling the pinch of the mortgage insurance each month. Make sure to take into account a larger loan amount with the pre-financed mortgage insurance payment, and the subsequent premiums.

5. Check with your lender. In some states, mortgage insurance is not required or can be avoided with a larger down payment (usually at least 10%). Make sure you understand the terms of your mortgage insurance, and when, if ever, it will expire on your mortgage.