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Mortgage insurance calculations When the buyer finally chooses a house, he or she will be choosing between two types of mortgage insurance plans. One is the PMI or the private mortgage insurance and the other is the tax-deductible mortgage insurance. If the buyer can give a down payment of 20% or more of the current market value of the house, none of these two insurance plans are required. The only insurance needed is the typical home insurance with low-interest rates. But if the down payment on the house is less than 20% of its value, the buyer must determine which insurance plan is more advantageous depending on the tax bracket, the mortgage term, the PMI premium, the interest rate increment, and the law on the termination of mortgage insurance. If the buyer belongs to a higher tax bracket, then the tax deductible insurance is the better choice than the PMI. And if the mortgage term is only for a short period of time, such as five years, the tax deductible insurance is again recommended because the tax savings that can be obtained are high during the early years of the mortgage. At the same time, the insurance premiums steadily decrease. But if the buyer intends to live in the house for the rest of his or her life, such as 30 years, then the PMI is the better option. The PMI is not the same for all homeowners. If the PMI premium is significantly lower, then it is the better choice than the other type of mortgage insurance. But if the increments of the interest rate of the tax deductible insurance are small, then it is a better choice over the PMI. And finally, the Federal law on mortgage insurances is automatically cancelled when the balance of the loan has reached 78% of the original value of the house. |