If you do not have enough cash to make the required down payment but you are yearning for the dream home or a shelter, mortgage loan insurance will make it possible for you to own your house. Mortgage loan insurance is an alternative method of owning your home when you are paying less than 20% of the purchase price as down payment.

Scenario

Let us find out how mortgage loan insurance is calculated with the help of the following example –

For instance, you are obtaining a mortgage loan for 15 years and one which has fixed-rate mortgage at 7.5% so that you can buy a house that costs USD$100,000. If you don’t have mortgage loan insurance, you can borrow up to USD$80,000, which is 80% of the value of the property. In case you are having mortgage loan insurance, you can obtain a loan of USD$95,000, which is 95% of the property value. In case you borrow, USD$95,000, the insurance premium will be 0.79% of the loan balance each year for the initial 10 years. Thereafter, it reduces to 0.20%.

The best way to calculate the cost of mortgage loan insurance premium is to divide USD$95,000 into 2 parts. The first part is USD$80,000 that has an interest rate of 7.5%. The first part has the interest rate only. The second part is USD$15,000 and includes insurance premium as well as the interest rate. The interest cost on USD$15,000 is found to be 12.7% provided you continue staying in your home for 10 years. This gradually drops to 12% if you continue staying for a period of 15 years.

However, it is found that the cost of USD$15,000 is approximately 5.2% higher as compared to the cost of USD$80,000 loan. This is due to the fact that when you are borrowing the USD$15,000, you are paying the premium not only for USD$15,000 but for the entire loan amount that is USD$95,000. You can reduce the cost of mortgage loan insurance in case you can do away with it earlier.