How Is Lenders Mortgage Insurance Calculated?

May 28, 2020

Buying a home is a big deal and it requires a major investment, usually in the form of a down payment for a mortgage loan. Regular payments are made toward the repayment of this loan, so if you have a steady income and budget responsibly, the monthly costs should hopefully be manageable. If you cannot afford the entire down payment, however, you could also opt for making lenders mortgage insurance payments instead, essentially increasing the cost of the payments in lieu of a hefty down-payment. Many factors go into calculating the price of lenders mortgage insurance, and here are a few that you should keep in mind.

The Down Payment

The payments you need to make on your home will be cheaper if you make a larger down payment, so paying the most you can up-front is ideal. If you want to avoid lenders mortgage insurance entirely, you would be best served by saving up for a deposit that is generally worth up to 20% of the home's value. Failing this, you will need to take out a loan for the portion of the mortgage that was not covered by a down payment in addition to paying the lenders mortgage insurance costs. The LVR (or, "loan-to-value ratio") of a loan describes the size of a loan as compared to the cost of the property it is paying for, and it will be smaller if you pay more up-front; paying 5% less on a home might not seem like a lot at first glance, but when the home costs $200,000 and the insurance you need to pay goes up by two thousand dollars for every 5% you don't pay, the costs will stack up quickly.

The Home Itself

The cost and size of the house in question will be a major contributing factor as well. Simply put, the insurance you will need to cover the mortgage will get more expensive the more costly a property you wish to get a mortgage for. This insurance is payable up-front as a fee, but it can be rolled into your monthly payments as part of the mortgage loan. The tradeoff to this, of course, is that the cost of the insurance will accrue interest because it is now part of your loan. The proportion of insurance you pay will tend to be smaller for cheaper properties as well, which is also worth considering if you aren't sure if a larger property is worth buying.

Loan Risk

Other miscellaneous factors that may increase the cost of your lenders mortgage insurance is whether or not you are a first-time homeowner and the length of the mortgage you are buying insurance for. In general, if you plan on paying your mortgage over a longer period of time you can expect to pay less every month. As is the nature of loans, however, you will be paying more money in the long-term in this case since that loan will be expected to accrue more interest. Additionally, you may find that you are paying more in premiums if you are considered a higher-risk borrower as a result of having a lower credit score or choosing an adjustable-rate mortgage, amongst other factors.

Choose Wisely

All in all, the amount of money you pay for lenders mortgage insurance depends on both circumstance and choice on the part of the mortgage borrower. This allows for a measure of planning on the part of the prospective borrower, but the best choices that can be made to make your monthly home payments cheaper are those that can prove you are at a low risk of failing to pay back your loan. While this is not always possible, you still have a choice before you sign the contract; make sure it counts.


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