How do you calculate mortgage insurance?
Calculating Mortgage Insurance
Mortgage insurance is a type of insurance policy that covers the lender in case the borrower defaults on the loan. It is usually required in the form of private mortgage insurance (PMI) when borrowers don’t make a down payment of at least 20% on most conventional loans. For FHA loans, it’s called a mandatory mortgage insurance premium (MIP). If you fit into either of those categories, then mortgage insurance is something you’ll have to deal with.
That said, learning how to calculate mortgage insurance will help you to better understand the inner workings of your mortgage payments.
How to Calculate Private Mortgage Insurance (PMI)
Private mortgage insurance rates are variable depending on your loan amount, the value of your down payment and the lender originating your loan. Typically, the annual PMI rate can be anywhere between 0.3% and 1.15% of your total loan amount. Most lenders have a PMI table that matches your loan to value ratio (LTV) to an applicable interest rate.
To calculate PMI:
Determine the purchase price of the home.
Confirm your loan to value ratio. (Taking into account your down payment amount)
Determine the loan terms; loan type and length do play a role in the calculations.
Find out the annual insurance rate by checking with your lender (The PMI table should be available on their website if nothing else).
When you’ve found your rate, all that's left to do is the math.
Convert your annual insurance rate from a percentage to a decimal (1% becomes 0.01)
Multiply your total loan amount by the insurance rate to find the annual payment amount (i.e. $200,000 x 0.01 = $2000)
If you want to determine the monthly payment, divide the annual payment by 12 (i.e. $2000 / 12 = $166.67)
This figure can be added to the P&I payment on your mortgage to give you a better idea of your total home loan expenses.
How to Calculate Mortgage Insurance Premiums (MIP)
Mortgage insurance premiums for FHA loans are often divided into two parts. The first portion is the upfront MIP, which is simply 1.75% of the total loan amount. The second portion, the annual MIP is a little more complex. AMIP is calculated as an annual figure, but paid monthly. It is based on a few factors like loan amount, loan duration, and LTV.
To get a better understanding, the FHA has created tables to help calculate your MIP rate:
AMIP Rates for Loan Terms Over 15 Years:
AMIP Rates for Loan Terms Up to 15 Years:
How long you will have to pay AMIP:
To calculate MIP:
Find total loan amount
To determine UMIP, multiply this figure by 0.0175 (i.e. $200,000 x 0.0175 = $3,500) This is a one-time fee that is meant to be paid at closing, or it can be rolled into the total cost of the loan.
Determine your loan to value ratio
Use the provided table to find your AMIP insurance rate (referred to as basis points or BPS)
Once you have your rate, the calculation comes next:
Convert AMIP rate from a percentage to a decimal figure (i.e. .45% becomes 0.0045)
Multiply your total loan amount by your listed AMIP rate (i.e a borrower with a 15 year, $200,000 loan and an LTV of 85% would calculate $200,000 x 0.0045 = $900)
To determine the monthly payment amount, divide the above result by 12 (i.e. $900 / 12 = $75)
And voila! There you have it. Now, no matter what mortgage insurance you may have to contend with, you’ll be ready!