How Much Mortgage Insurance Should You Get

When you take out a mortgage to purchase a home, lenders will generally require you to take out a private mortgage insurance to protect him against losses in case you default on your payment.

Aside from protecting the lender against payment delinquency, taking out a private mortgage insurance serves to decrease the equity that the home buyer should raise to be able to purchase the home sooner. With a mortgage insurance coverage, a home buyer can own a house with as little as 3% equity down payment with the mortgage company assuming 97% of the total purchase price of the house.

Just how much mortgage insurance should you take out on your home? Is it equal to the amount of your mortgage? What about interest payments? Some companies offering mortgage insurance products show you how to calculate mortgage insurance. Generally, the cost of buying a private mortgage insurance is dependent on the amount of down payment and the type of the loan involved. A ballpark figure for a mortgage insurance premium is about 7/10 of 1% of the loan amount.

When you calculate mortgage insurance payments, there are two items to consider. One is the type of the loan (a 30-year fixed rate loan, a 15-year fixed rate loan or a 1-year adjustable rate mortgage) and the other one is the amount of downpayment. There is a table of factor rates that is used to calculate mortgage insurance payments. The factor rate table differs across different mortgage insurance companies. To calculate the mortgage insurance cost, take the loan amount, multiply it by the factor rate and then divide the product by 12. This formula should show you how to calculate mortgage insurance cost. The resulting amount using this formula is the monthly cost of mortgage insurance.

When you calculate the mortgage insurance cost on a monthly rate, the resulting monthly cost is dependent on the type of loan that you take out. A repriceable loan would fetch a higher mortgage insurance cost. Understandably so because of the amount of losses the mortgage company stands to lose on this type of loan in case of a default. A middle-tenor loan would be priced lower than a long-tenor loan. The amount of down payment also has a correlation to the factor rates used in the “how to calculate mortgage insurance cost” table. The bigger the amount of down payment the lower the factor rate used to calculate mortgage insurance cost. The smaller the amount of down payment conversely results in a higher factor rate.

Premiums for mortgage insurance may be collected by the insurance company in several ways. It could be charged as a monthly payment. A monthly billing will be issued to the borrower/home owner. It could be charged as a lump sum amount at closing. Or it could be incorporated in either the loan amount or the loan’s interest rate. Taking on mortgage insurance is entering into another contract. While you really do not have much choice in purchasing such insurance coverage, be sure to review all the benefits and stipulations in the mortgage insurance contract before signing the dotted line.