How To Calculate Mortgage Insurance Payments With Mortgage Calculators

July 07th, 2010

Online mortgage calculators are great tools for determining mortgage refinance options, compliance with prequalification guidelines, and other factors for your mortgage needs. However, mortgage calculators do not always provide fully accurate mortgage insurance payments for different types of mortgages. Here are some quick tips you can use with your home calculator to enhance the accuracy and usability of the conclusions you reach using free online mortgage calculators.

Many homeowners are concerned about the higher cost for FHA because of the frequently required mortgage insurance. But with loan-to-value (LTV) ratios up to 96.5%, FHA can be a very good mortgage offering for many prospective refinance borrowers.

FHA mortgages have two types of mortgage insurance premiums: upfront mortgage insurance (UMIP), and monthly mortgage insurance (MMI). When entering an FHA loan amount in a monthly payment calculator, first calculate the UMIP for FHA using your calculator, and add that to your base loan amount. The UMIP is 2.25% of the loan amount, hence base loan amount x 0.0225 = UMIP. MMI is 0.55% of the base loan amount, and is added to the monthly mortgage payment; base loan amount x 0.0055 = annual MMI, then divide by 12 = monthly MMI.

FHA Example

With mortgage rates at historic low you may find ia the above exercise that an FHA mortgage can save you significantly on your monthly mortgage payment, even with mortgage insurance.

Mortgage insurance coverage for conventional mortgages with loan-to-value ratios greater than 80% is supplied by private companies, and is therefore frequently called Private Mortgage Insurance (PMI). PMI is easier to calculate than FHA mortgage insurance as there is only one premium, similar to MMI. Simply multiply the base loan amount x PMI premium factor = annual PMI, then divide by 12 for your monthly PMI payment.

Because the insurance is private and not a federal program, the insurance rates vary, both across the country and by loan program. Mortgage insurance premiums also vary depending on your loan to value. Here are some current examples based upon a $200,000 mortgage; they may vary by state and loan amount:

Also, PMI may be restricted by some companies in certain states on “hi-balance” conventional mortgages (mortgages over $417,000). For this reason it is important to get accurate PMI quotes when discussing mortgage rates and programs with your mortgage professional, based on your particular criteria including loan amount, location, and LTV.

Why Mortgage Insurance?

The benefit of mortgage insurance, whether FHA or private, is that it allows you to obtain a mortgage with a loan-to-value ratio greater than 80%. However, it is important to note that mortgage insurance is paid by you to protect the lender against your potential default; it does not protect you.

Most lenders require mortgage insurance to be paid until the mortgage balance declines to 75-80% of the value of the property as of when mortgage insurance was contracted; under normal amortization this might typically be from seven to ten years. Time frames may vary depending on loan amount and your lender’s requirements.

Legislation in recent years has made mortgage insurance premiums currently tax deductible for many Americans. Such a deduction may mitigate the costs of your mortgage insurance; check with your tax professional to see if you are eligible for such a deduction. Note that this legislation is set to expire in the next few years, and may not be renewed.

What Now?

Many homeowners are hesitant to refinance their current mortgages with high interest rates because the decline in their home’s value puts them in a position where they must have mortgage insurance if they refinance.

Before deciding not to refinance just because of the possible addition of mortgage insurance, check the math using a free online mortgage refinance calculator to see how your monthly payment might be affected by the addition of mortgage insurance. If you will save considerably on your monthly mortgage payment even with mortgage insurance, you should strongly consider refinancing your mortgage.

Posted By :
Dennis C. Smith is co-owner and broker of record for Stratis Financial in southern California. He has over twenty years' experience in the mortgage industry.

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