When considering purchasing a home, you must account for how much of a down payment you can afford to make. If you cannot put down at least 20 percent, you should factor in the cost of private mortgage insurance premiums when figuring out the size of the monthly payment you can afford.
Private Mortgage Insurance Rate
The annual rate for private mortgage insurance varies between 0.5 percent and 1 percent, according to Bankrate.com. The exact percent varies from lender to lender and also depends on the size of your down payment. If you put down a 15 percent down payment, you are likely to have a rate much closer to the 0.5 percent floor, while a 5 percent down payment is more likely to get a higher rate. This is because the larger the down payment, the lower the risk for the lender.
Calculating Your Monthly Premium
To figure out how much your private mortgage insurance adds to your monthly mortgage payments, divide the annual rate by 12 and multiply the result by your outstanding mortgage balance. For example, if your mortgage insurance premium rate is 0.84 percent and you owe $188,000, divide 0.0084 by 12 to get 0.0007. Then, multiply 0.0007 by $188,000 to find that each month you pay an extra $131.60 on your mortgage.
Duration of Premiums
Your lender must usually stop charging for private mortgage insurance when you reach 22 percent equity in your home. You can request that your private mortgage insurance be canceled when you reach 20 percent, but you typically have to submit and pay for a home appraisal to prove that your home has not declined in value. However, some mortgages include terms requiring that private mortgage insurance be maintained for a specified period of time, such as five years, even if you achieve 20 percent equity in your home before then.
Offsetting Tax Savings
If your adjusted gross income is low enough and you took out your mortgage in 2007 or later, you can claim a tax deduction for your private mortgage insurance premiums that offsets part of the cost of private mortgage insurance. As of 2011, the limits are $50,000 for married couples filing separately and $100,000 for all other filing statuses. In addition, you must itemize your income tax deductions, meaning you cannot claim the standard deduction.
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