How to Calculate Mortgage Insurance Rates

Mortgage insurance is insurance coverage that protects the mortgage lender against losses in case the borrower defaults on payments. Years ago, home buyers had to make at least a 50% down payment when buying a home. The use of mortgage insurance has revolutionized home buying by allowing a borrower to put as little as 3.5% down (for an FHA loan), and sometimes even less. In conventional lending (Fannie Mae/Freddie Mac) no mortgage insurance is required with a 20% down payment, but lower down payments will require private mortgage insurance.

Things You'll Need

• Calculator Correct loan amount Rate for mortgage insurance

Instructions

Calculations for FHA, Freddie/Fannie and ARM Loans

1. Calculate your new loan amount for an FHA purchase loan. There are two calculations of mortgage insurance for most FHA loans. First, the UFMIP (upfront mortgage insurance premium) is insurance for the life of the loan. FHA's low down payment requirement is only 3.5%, so the UFMIP amount is normally financed into the loan (but it can be paid in cash at closing either by you or the seller). If financed, it is added back to your loan amount. To calculate the UFMIP cost, multiply your loan amount by 1.75%. (Example: loan amount of $100,000 + [$100,000 X 1.75%] = $101,750 new loan amount.) This is the first calculation. The second calculation (monthly MIP) is for a monthly amount. This calculation is shown in the next step.

2. Calculate the monthly MIP add-on for the FHA loan. If your loan is more than 15 years in length, multiply the new loan amount by .55% and divide by 12 to figure the monthly amount. (Example: If using the loan amount in step 1, then $101,750 X .55% = 559.63, divided by 12 = $46.64 monthly MIP.) This monthly amount will be added to your monthly payment. To figure your entire monthly payment, add your principal and interest payment, plus 1/12th of your year's taxes (year's cost of your property taxes, divided by 12) and 1/12th of your year's homeowners insurance costs (year's cost of your homeowner's insurance, divided by 12), and finally add the monthly MIP cost ($46.64, in the example).
   There is no monthly MIP on FHA loans with a term of 15 years or less.

3. Calculate monthly PMI with conventional (Fannie Mae or Freddie Mac) purchase loans. Because these insurers are private companies, the coverage is called private mortgage insurance (PMI). Most conventional lenders are requiring 10% down payment, so the loan is 90% loan-to-value percentage.
   For fixed-rate loans that are 85.01% to 90% loan to value, PMI = loan amount X .75%/12. This figure is then added to your monthly payment. (Example: $100,000 X .75% = $750, divided by 12 = $62.50 monthly cost.) Your total monthly payment will consist of monthly principal and interest + 1/12 of the year's taxes + 1/12 of the year's homeowners insurance + monthly PMI.
   If your loan amount is 85% of the purchase price (meaning a 15% down payment), the calculation for fixed-rate loans is the loan amount X .65%/12. This figure represents the monthly amount added to your monthly payment.
   There is no mortgage insurance required with a 20% down payment.

4. Calculate higher monthly PMI for ARM (adjustable rate mortgage) loans. Because mortgage insurance companies believe ARM loans (which can adjust upward) are higher risk, they charge higher rates for PMI. For an ARM loan with yearly caps (maximum yearly rate adjustments) of higher than 1% (usually 2%) and that are 85.01% to 90% loan to value, multiply the loan amount X .96% /12, to get the monthly amount. (Example: $100,000 X .96% = $960, divided by 12 = $80.00 added to your monthly payment.)
   If your ARM loan has a yearly adjustment cap of 1%, then multiply the loan amount X .92% /12, to get the monthly add-on of PMI for your ARM loan.
   There are some minor add-ons for these rates depending on if you are purchasing or refinancing, if your company is relocating you to another city, or if the loan amount is higher than the Fannie Mae/Freddie Mac limit of $417,000.

5. Calculate different percentages on conventional loans under certain circumstances. If you are purchasing a home and are fairly sure that you will be selling and moving within the first 5 years, you might choose a conventional One-Time Mortgage Insurance pay product. Although it is more expensive, it can be financed with the loan. For 85.01% to 90% loan-to-value loans that are 30 years in length, multiply the loan amount X 2.40%. This amount is added to the loan amount and financed. (Example: $100,000 X 2.40% = $102,400 new loan amount.) If you sell the home within the first 5 years, you will receive a prorated refund of the mortgage insurance amount. If the loan is 80.01% to 85% loan to value, multiply the loan amount X 1.60%, and add that figure to the loan amount. You will be refunded a prorated portion if you sell or pay off the loan within the first 5 years.
   PMI "refund" rates are even higher.For loan to values of 85.01% to 90%, where the ARM adjustment cap (max adjustment) is 2% per year, multiple the loan amount X 2.85% and add to the loan amount. Again, there are pricing adjustments for relocation employees, refinances, and loan amounts higher than $417,000 (the maximum conforming loan amount).

6. Monitor your balance over time. You can pay extra payments with an FHA loan, and when 5 years of on-time payments have been paid and the balance is down to 78% of the initial purchase price, you can request that the monthly MIP be dropped from the monthly payment. (If no extra payments are made, it will drop off automatically when it reaches 78% of the initial purchase price.)
   With a conventional loan, you can make extra payments to pay down the balance; then, when your loan is at 80% of the initial purchase amount, request that the monthly PMI be dropped. You can also provide your lender with an appraisal to prove that your value has increased and that your loan is at 80% of the new increased value, and then request that monthly PMI be dropped. In any event, do nothing (except make all payments on time) and the PMI will drop off automatically when the loan reaches 78% of the initial purchase price.

Tips & Warnings

• Your mortgage insurance may be tax-deductible, depending on when you began your loan. Check with your CPA or tax professional..

• To drop monthly MIP from an FHA loan early, the payment history must be 5 years in length. The lender will review the 5 -year history to be sure payments were made in a timely manner. To drop monthly PMI from a conventional loan early, most lenders want at least a 2-year payment history. The lender will review the 2-year history to be sure payments were made in a timely manner. If you have chosen the One-Time Mortgage Insurance on a conventional loan, where it is financed, the only way to not pay PMI is to pay off the loan. The purpose of this type of mortgage insurance coverage is to get a rebate back by selling the home within the first 5 years of ownership. Since the mortgage meltdown, most conventional loans require a 10% down payment on all loans..

References

• FHA Mortgage Insurance
• New law requires lenders to cancel mortgage insurance
• Research and Learn, Mortgage Insurance

Resources

• Private Mortgage Insurance Company/typical rates