How to Calculate Mortgage Insurance Payment?
Mortgage Insurance, also called PMI (private mortgage insurance) is designed to protect the lender if the borrower should default on his or her home loan, and is usually required if the down payment on the home is lower than 20%. The home owner pays for the insurance, and the cost is usually added into the monthly mortgage insurance payment.
So, how do you calculate mortgage payment with taxes and insurance? Here's how:
- Determine the Purchase Price of the Home: Even if you're just shopping around, you likely have an idea of what you're going to be able to afford. Then determine your LTV (loan-to-value) ratio.
Even if you are just beginning to look for a home, you probably already have a good idea about the price of the home you can afford to purchase. The purchase price of the home will help you determine your loan-to-value ratio. You calculate this by taking the amount you borrow, and dividing it by the property value. The higher the LTV, the higher the cost of mortgage insurance payment. For our purposes, we're going to assume that the amount of the loan is $225,000. If you've made a down payment of $22,500, that's 10%. 90% is outstanding, so your LTV ratio is 90%.
- Consider the Term of the Loan: The shorter the loan, the lower the insurance rate. Also, a fixed rate loan will cost you less than an adjustable rate. Let's assume that you're taking out a 30-year mortgage.
- Factor in Buy Downs: This is also known as "purchasing points," and it means that you're buying down your interest rate. Purchasing points raise your insurance rate. Let's assume that you're not buying down. It makes it easier for our purposes, since buying down is incredibly complex.
- Find Your Rate: To determine your mortgage insurance payment rate, go to your lender's website and look for a table. If you don't have a lender, you can still find a table by Googling " calculate mortgage payment with taxes and insurance. " If you want to try it out, use the figures we've just provided. You'll likely find that, using our figures, your mortgage insurance payment rate or mortgage insurance rate is going to be 0.52%.
- Do the Math: Calculate mortgage payment with taxes and insurance and know how much you'll be paying, multiply the loan amount by the annual mortgage insurance rate. In our example, that would be $225,000 multiplied by .0052, which would give you a total of $1170. Now divide by 12 to find your monthly mortgage insurance payment - it is $97.50 per month. You add this amount to your principal, interest and taxes to find out how much your mortgage insurance payment is going to cost you per month.
THINGS TO REMEMBER.....
…Keep in mind that you're not going to need mortgage insurance forever - one you've reached 20% equity in your home, you can ask your lender to cancel your mortgage insurance. Don't expect them to do it automatically - they likely won't until you hit 22% equity, so you're going to have to send a letter asking them to do so.
Remember that if you agree to a higher interest of mortgage insurance rate, some lenders may waive mortgage insurance. It's a tradeoff. The rate hike is for the whole term of the mortgage, but the insurance only is in effect until you reach the right equity level. It's up to you, but generally speaking, you can end up paying more if you take the tradeoff. Your interest payments are also tax deductible, but payments on the premium aren't.
The type of home you own could also affect your mortgage insurance rate. If you've bought a condo, your insurance rate will likely be higher. If you're in an area where housing prices are going down, you may also be charged more, or even be denied mortgage insurance.
Also, keep in mind that there's a difference between insurance that you pre-pay, and insurance that you pay monthly. Sometimes, lenders want up-front payments. Others will allow you to pay monthly. Monthly premiums, of course, mean no huge cash outlay in the beginning. But you could risk forgetting to cancel once you hit the 20% equity point.