How to Calculate a Mortgage Insurance Premium

Knowing how to calculate a mortgage insurance premium is a good idea for anyone wishing to secure a mortgage, refinance an existing mortgage or take out a second mortgage on a piece of real estate.  Determining the amount of the premium makes it easier to know how much of the monthly mortgage payment is going toward principal and interest, and what is going to pay for the cost of the insurance coverage.

1. Get an idea of what the property is worth versus the amount of money that will be borrowed as part of the mortgage financing.  This is because the premium will be based on what is known as the loan to value ratio.  If the home is worth $250,000 and the applicant is putting down a $50,000 down payment, this means that the actual amount of the mortgage related to the actual purchase will be $200,000, plus any interest, closing costs and other fees.  For purposes of determining the mortgage insurance premium, this divide the amount financed for the purchase by the worth of the home to identify the loan to value ratio, which in this case comes to 80 percent.


2. Find out what type of mortgage insurance must be carried on the loan.  Many lenders use specific providers and bundle the cost into the mortgage payments, but it is also possible to secure mortgage insurance from an outside source and still lock in the interest rate discounts and other benefits offered by the lender.  The idea is to see if the rates are better with an independent provider or if going with the bundled option appears to be the best bet.


3. Calculate actual costs using the percentages associated with each mortgage insurance premium option.  Along with the percentage, also look closely at how that percentage is applied to the balance of the loan.  Just as with interest rates, the calculation may involve breaking down the annual figure based on actual calendar days, a 360-day year, or a 364-day year.  This means that the premium offered by one provider may be a lower percentage, but in fact costs more due to the way the percentage is applied.


4. Determine the final breakdown into a monthly mortgage insurance premium based on the data assembled. After identifying the option with the best overall annual cost, determine the monthly cost by taking the loan to value ratio and multiplying it by the annual percentage rate of the coverage.  That amount can then be divided by 12 to identify the basic monthly premium that must be paid separately or as part of the bundled monthly mortgage payment.


5. Look for add-ons.  Keep in mind there may be additional fees associated with the mortgage insurance coverage that is tacked on to the basic premium.  Get specifics and add those to the monthly cost before signing anything.  Doing so will make it much easier to budget the final amount and rest assured you have the best possible coverage at an equitable cost.