How To Calculate the Mortgage Insurance Premium
With mortgage insurance, you may be able to buy the house of your dreams, rather than just the house for which you have a 20% down payment. Consider these other advantages of mortgage insurance:
• • • Using MI and a lower down payment means you need less cash at closing. Because less down payment is required, you can get into a larger house with MI. Using MI may help reduce your taxable income.1 Mortgage loan interest is now the only form of consumer interest that is tax deductible. Financing the MI premium as part of the mortgage results in a slightly larger loan amount and possibly a larger tax deduction for mortgage interest. A financed premium also results in even lower monthly MI cost (see the example below).
(Examples are based on a 10% down payment, 30-year fixed-payment loan, 8% interest, 95% LTV, with 25% MI coverage required by Fannie Mae/Freddie Mac.)
Monthly Premium Calculation (one month’s premium due at closing) Loan amount x MI monthly premium factor = Annual payment Annual payment ÷12 = Monthly premium Example: $95,000 x .52% = $494/year $494 ÷ 12 = $41.16/month for MI
Financed Premium Calculation (no extra cash for MI at closing; entire premium financed) Loan amount x MI financed premium factor = Financed premium Example: $95,000 x 2.35% = $2,232 total MI premium. This amount is added to the total mortgage amount, and no separate MI payment shows up in the monthly mortgage payment. Considering that the average mortgage is kept for seven years, the monthly cost can be calculated as: $2,232 ÷ 7 years = $319/year $319 ÷ 12 = $26.60/month MI “cost.”
1
Consult your tax adviser for additional details.