Also known as Private Mortgage Insurance (PMI), mortgage insurance (MI) is basically insurance that protects the lender in case the borrower defaults on the loan. For homes that were purchased with less than 20% down, PMI is mandatory under the law. This means that for those who cannot make the 20% down payment, they can expect to have mortgage insurance premiums to pay as well.
To help those who are facing mortgage insurance better know what they will be paying, there is a mortgage insurance calculator that provides a solid means of predicting the future costs which can be taken into account when considering purchasing a home.
How to Use the Mortgage Insurance Calculator
There are a number of steps to follow, but if you do them in the right order and with the proper information, you’ll get a good idea of how much your MI payment will be. Once you have made the determination, you can then work with a lender to see if you can improve that rate even more in your favor.
Purchase Price: You should know what you can afford in purchasing a home, so here you need to focus on the purchase price itself to determine your loan-to-value ratio.
The Loan to Value: This is how lenders calculate how much you owe and how much you have paid on the mortgage. The more you owe, the more the MI will cost. For example, if you have a $225,000 loan with a 10% down payment, then you still owe 90%.
Type of Loan: Basically, the shorter the loan, the lower the MI rate you must pay since the coverage is of less time. Most loans are the standard fixed rate, 30 year variety so you can start with that. However, if you know you can get a 15 year loan then use that as your basis.
Amount of Buy Down: If you buy down the interest rate on your mortgage, then that is a factor as well. While there are advantages and disadvantages, you need to calculate that into your mortgage insurance calculator.
If you buy down, then the seller contributes funds to an escrow account which in turn lowers the monthly mortgage rate for the buyer. However, the seller will usually raise the price of the home itself in response. Generally speaking, a buy down is used to help buyers get a mortgage thanks to lower monthly payments. Most buy downs reduce mortgage payments for only a few years.
Mortgage Insurance Rates: Here, all you need to do is go to the lender’s website and find the table where the percentages are located. If you don’t have a lender yet, then there are plenty of independent tables that you can find. In most cases, this is pretty easy to determine.
Add it Up: Now that you have all the information, you can put it together using a little math.
- Multiply the loan amount by the mortgage insurance rate
- Divide the annual amount by 12 to determine the monthly rate
- Add principle, taxes, interest and insurance payment to figure out your total month rate
Basically, that is how to use a mortgage insurance calculator. You can find some online to help you do the math, but all you really need is the information above and a calculator or pencil and paper.
Remember that mortgage insurance will not last forever, so you can cancel it after your loan to value reaches 80%. Some lenders will not cancel until it reaches 22%, but you can go ahead and make the request yourself once the 20% level has been reached.
Credit Score: Understand that your credit score will play a very important role in the type of mortgage you can get. The better your credit score, the better the mortgage will be. If you have a poor credit score, then getting the best loan will be more difficult.
Higher Interest Rate: Another factor is that your lender may not require mortgage insurance if you agree to a higher interest rate. Usually, this is .75 to a full 1 basis point depending on your down payment. Naturally, this is a tradeoff since you are still paying a higher amount. However, raising your interest rate will last the duration of the loan while MI will only last until the 20% LTV has been reached. So in the long run, you are paying more with a higher interest rate. However, the one advantage is that interest rates are tax deductible, unlike your payments on the MI.
Location & Type: You may very well be the victim of circumstance depending on the type of residence and location of your home. For example, condo are generally higher in terms of insurance rates because there is much more volatility than a single family home. Also, a home in a neighborhood where the values are falling may not even get mortgage insurance because your home will not be worth it.
Prepaid Insurance vs. Monthly Insurance: Are you paying your lender a lump sum or spread out over several months? Paying by the month has two advantages, a smaller initial cost and you can cancel right when you reach the 20% mark which you can overshoot when paying in one lump sum.
Overall, understanding how to use the mortgage insurance calculator can help you determine the true amount of money that is being paid for your home. This information can be very valuable in knowing just how much you owe on your home and where it fits into your current budget. In fact, it should be considered a requirement that you know and understand how to use a mortgage insurance calculator so you can get the best deal possible.
One thing to remember, lenders may cancel the mortgage insurance once it reaches 20% of LTV, but it does require you making the request. Only when the LTV reaches 22% are the lenders forced to cancel the mortgage insurance on their own. By initiating the request, you can save yourself money that can be used for other purposes.