Mortgage Insurance Insert

Understanding Mortgage Insurance

Mortgage Insurance (MI), also referred to as Private Mortgage Insurance (PMI), insures a portion of the equity in the event a home owner defaults on the mortgage. It is required by many lenders when the first mortgage loan amount exceeds 80% of the value of the home. In the case of a purchase, the lender will look at the purchase price and the appraised value and use the lesser of the two. For example, if a home is purchased for $100,000 and the appraised value is $110,000, the value used will be based on the purchase price of $100,000. The amount of mortgage insurance a borrower pays depends on the loan to value, loan program and credit scores.

Loan to value (LTV) is usually expressed as a percentage as shown in the following example:

  • Purchase Price: $100,000
  • Loan Amount: $90,000
  • Loan to value = (Loan Amount ÷ Purchase Price) x 100
  • Loan to value = ($90,000 ÷ $100,000) x 100 = 90%

Mortgage Insurance companies break down the insurance premiums into the following LTV categories:

  • 95.01% and above
  • 90.01% - 95%
  • 85.01% - 90%
  • 80.01% - 85%
  • 80% & below no MI is required

Within each LTV category their are different "factors" that are used to calculate the actual MI payment depending on credit score and the qualifying loan program. For example MI coverage for standard Fannie Mae approvals use the following factors to determine the payment:

Untitled Document
Private Mortgage Insurance Chart
  Required
Coverage		 Credit Score
620 or Better
Factor		 Credit Score
600 - 619
Factor		 Credit Score
575 - 599
Factor
LTV
95.01% &
above
35% .96% 1.88% 2.57%
30% .84% 1.64% 2.24%
25% .71% 1.47% 2.00%
20% .59% 1.37% 1.86%
18% .55% 1.18% 1.61%
12% .49% N/A N/A
LTV
90.01%
to 95%
35% .90% 1.51% 2.06%
30% .78% 1.32% 1.80%
25% .67% 1.18% 1.61%
20% .56% .1.04% 1.42%
18% .54% 1.00% 1.37%
LTV
85.01% - 90%
30% .60% 1.00% 1.36%
25% .52% .90% 1.22%
17% .39% .72% .98%
16% .38% .69% .94%
12% .34% .57% .77%
LTV
80.01% - 85%
25% .43% .75% .43%
17% .37% .62% .83%
12% .26% .53% .72%
6% .21% .45% .61%
Please note: Factors shown are base rates and may have additional add-ons depending on the loan scenario. Rates are subject to change at any time. Rates are for example purposes only. For accurate quotes please contact your loan officer.

The formula to calculate the monthly MI payment is as follows:

     Monthly MI = (Loan Amount x MI Factor) ÷ 12 months

For example if a borrower is purchasing a home for $100,000 with 100% financing, credit score of 650 and a loan program that requires 35% coverage (factor would be .96%), the MI payment would be:

     Monthly MI = ($100,000 x .0096) ÷ 12 months
     Monthly MI = $80 per month

The percentage of coverage required is dependant on the loan program. Contact your loan officer to determine which loan programs are available for your loan scenario.

A borrower can avoid paying mortgage insurance by structuring a mortgage as an 80% 1st mortgage and a 2nd mortgage to cover the difference. Lenders may also offer higher rates in lieu of paying mortgage insurance. These programs are referred to as "Lender Paid MI". Contact a Loan Officer to calculate the payments for each loan program to determine which program is best for you.

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