For the purposes of this article, let’s assume a loan amount of $225,000. Say you’re buying a house that costs $250,000 and you’ve put 10% down on the house, or $25,000. Because you’ve only paid 10%, and 90% is still outstanding, your loan is $225,000 and your loan-to-value ratio is 90 percent.
If you have a Federal Housing Association (FHA) loan, you will have a type of insurance called Mortgage Insurance Premium (MIP) instead of PMI. This is still a type of mortgage insurance, but the structure of the loan is slightly different. Be sure to read the terms of the loan carefully to understand how MIP might be calculated for you. [2] X Research source
The easiest way to determine the rate is to use a table on a lender’s website. If you are already working with a lender, you can use the one on your lender’s website. If you do not yet have a lender, you can still find a calculator online to estimate the rate. One such calculator can be found at mgic. com/ratefinder.
First, determine the annual mortgage insurance amount. Do this by multiplying the loan amount by the mortgage insurance rate. Here, if the remaining value of your loan was $225,000 and the mortgage insurance rate was . 0052 (or . 52%) then: $225,000 x . 0052 = $1170. Your annual mortgage insurance payment would be $1170. To determine the monthly payment amount, divide the annual payment by 12: $1170 / 12 = $97. 50/month. You can add your monthly mortgage insurance amount to your principal, interest, taxes, and insurance payment to determine your total monthly house payment.
Keep in mind that lenders won’t automatically cancel your mortgage insurance until your equity reaches about 22% based on the original appraisal of the home. [4] X Research source Don’t wait for the lender to cancel the insurance for you. Do it yourself once you reach a 20% equity stake in your home. The lender will need an appraiser or real estate agent to give them a valuation before the insurance can be canceled. If you have an FHA loan, you need to have paid 22% of the mortgage before you can cancel the insurance. You also need to have made five years of monthly payments before it can be removed.
This is a tradeoff. Most people will pay more money in the long run, since the interest rate hike applies for the whole mortgage. Again, the mortgage insurance only lasts until the buyer has pumped enough equity into the home. You’ll most likely end up paying more if you make this tradeoff. At the same time, this tradeoff does come with one perk. The payments you make on your interest are tax deductible, whereas the payments you make on insurance premiums are not, unless you took out your mortgage after Jan 1, 2007 and your Annual Gross Income (AGI) does not exceed $109,000. If you fit this category, you can reduce your AGI by 12 times your monthly PMI payment. So in these parameters, it is deductible.
Paying your premiums monthly has the benefit of a smaller initial cost as well, and they are harder to forget. [6] X Research source Remember, you should request to cancel your mortgage insurance after you’ve reached a 20 or 22% equity stake in your home. You may forget to do so if you make an up-front payment.
