Jason Peatz – Mortgage Associate

Mortgage Insurance Fees

June 2, 2008 2:35 pm Jason Mortgage Insurance, Uncategorized

People don’t typically understand how the Mortgage Insurance Fee is calculated. This is too bad because it gives great insight into how lenders and insurers think, and can in- turn be helpful in other parts of the deal as well.

The fee is determined by the simple calculation noted below.

Fee = Premium rate X Mortgage Amount

We know what the mortgage amount is but how do they figure out the Premium Rate?

The premium rate is determined by two factors the Loan to Value and if you have decided to have an amortization that is greater than 25 years.

Loan to Value is calculated by the following calculation.

Property value – Down Payment = Loan to Value Ratio

Property value

So in the case of a house that is valued at $200,000 and the buyer has a $20,000 down payment then the loan to value is…

$200,000 – $20,000 = $180,000 = 0.9 = 90%

$200,000 $200,000

With a greater down payment that ratio reduces and with less of a down payment the ratio increases. The lender and insurer look at this ratio as one of the risk determinants. They believe that if the person has a greater down payment that it shows two things.

• First that they will have a greater incentive to make their payments because they have their own money tied to the property.
• Secondly that anyone that can save a large sum of money must be pretty good with their money and paying debts.

So the smaller the down payment the higher the premium and the larger the down payment the smaller the premium.

Extended amortizations are another factor that can affect the insurance premium. It used to be that the maximum amortization that was available was 25 years – so all insurance premiums were based upon the 25 year standard. Recently lenders have given the option of extended amortizations up to 40 years. By spreading the debt over an extra 15 years it reduces the monthly payments but it also increases the risk to the lender/insurer because the principle won’t be paid down as quickly. So they add to the premium for every five years that the amortization is extended beyond 25 years.

The system takes these two factors and comes up with the Premium Rate.

Please contact me.