Mortgage Insurance Premium Calculation

Mortgage insurance plans protect a money lender from losses if the borrower defaults on the mortgage. The borrower pays the insurance premium, which protects the lender. If the borrower defaults and the lender takes up the property, the insurer reduces or eliminates the loss to the lender. In simple context, mortgage insurance allows the mortgage insurer to share the risk of lending the money to the borrower.

Mortgage insurance plans are available for those who want to finance the purchase of a house. These insurance plans provide benefits to all home buyers, by dramatically increasing their buying power. Borrowers can use a low down payment to help them afford their home, as without the guarantee of mortgage insurance, lenders normally require a borrower to make a down payment of at least 20% of a house"s purchase price, which means years of savings.

For example, suppose someone goes for a mortgage to purchase a house of $200,000 value. Without mortgage insurance, one can only borrow about $160,000 while with mortgage insurance one can borrow about $190,000. The loan of $190,000 actuall is built up of two loans - one loan of $160,000 which includes only the loan interest rate and the other loan is the loan of $30,000 which includes both the loan interest as well as the policy premium.

When it comes to calculating mortgage insurance premium, there are two factors that determine how much premium a home buyer will pay - the type of loan and the amount of the down payment. More the down payment, lesser will be the premium. For example, With a down payment of 5% for a 30 year fixed plan, one may have to pay a premium of about 0.80% while with a down payment of 15% for the same duration, the premium will be as less as about 0.35%.

One simple way to calculate mortgage insurance premium is to use this method. First of all, calculate the Loan to Value ratio (LTV), where LTV = loan amount /total mortgage value. Now, the mortgage insurance rate needs to be calculated. Now, the premium can be easily calculated with this formula: Mortgage insurance premium (annual) = LTV amount x mortgage insurance rate.

Before going for a mortgage insurance, one should research well the benefits, liabilities and costs of owning mortgage insurance. Mortgage insurance may be tax deductible, resulting in some savings to the insurance applicant. Also, one should check and compare different available mortgage insurance plans to get one that suits.