A reader asks if there is a standard rate for mortgage insurance and how to calculate it.
Mortgage insurance protects a lender against loss if the borrower stops making mortgage payments. Most lenders or investors require mortgage insurance when the mortgage amount exceeds 80 percent of the property value.
FHA loans are covered by a mortgage insurance program administered by the federal government. Private mortgage insurance is sold by a number of companies - Mortgage Guaranty Insurance Corp. is one of the largest companies offering private mortgage insurance.
According to Mortgage Guaranty publications, the monthly cost of private mortgage insurance is governed by three factors:
The amount the buyer is putting down, which is expressed as a percent of purchase price - 3 percent, 5 percent, another figure.
The mortgage program, meaning if it's a 15- or 30-year fixed rate or adjustable rate.
The expected loan amount.
Using this information and Mortgage Guaranty's rate charts, the lender determines a rate factor. The monthly private mortgage insurance cost is calculated by multiplying the rate factor times the loan amount and dividing the product by 12.
The rate charts can be accessed at www.mgic.com. In general, the lower the down payment, the higher the monthly private mortgage insurance cost.
The premiums for fixed rate loans are lower than for comparable adjustable rate loans. Borrowers with lower credit scores must pay higher private mortgage insurance premiums than borrowers with credit scores of 600 or more.
A federal law covering loans closed on or after July 29, 1999, provides two important protections for private mortgage insurance borrowers:
Information: Lenders must inform borrowers at closing and annually about their right to cancel private mortgage insurance when the mortgage balance is 80 percent of the original value of the home.
Cancellation: Lenders must automatically cancel private mortgage insurance when the mortgage balance reaches 78 percent of the home's original value.
Lenders also may allow borrowers to cancel private mortgage insurance if the value of the home increases so that the loan-to-value ratio is 80 percent or less.
Consumers should contact their lender to find out its policies about cancellation under these circumstances. They also may have the option of refinancing their loan to eliminate private mortgage insurance by taking a second mortgage and using the proceeds to reduce the first mortgage to 80 percent or less than the value of the home.
However, second mortgage interest rates are usually higher than interest rates on first mortgages, so consumers need to calculate if there is a net saving by eliminating private mortgage insurance costs.