Mortgage Insurance Quotes Breakdown

A "schmortgageboard" of options

On the other hand...

Boasting only one advantage over PMI, a higher interest rate means that money spent on interest is entirely tax-deductible. Mortgage insurance is not. If you elect a high rate, the lender will purchase the private mortgage insurance on its own at a cheaper premium than you would pay. The interest rate charged to you covers the cost and provides a tidy profit for your lender throughout the life of the loan.

Private mortgage insurance appears to have many more advantages over taking a higher interest rate, but it's not that easy. While the premiums are not tax-deductible, mortgage insurance always ends at some point. As of 1999, Congress dictated that most mortgage insurance policies be cancelled once the balance on the loan reaches 80 percent of the purchase price.

In addition, all PMI polices cancel when the balance reaches 78 percent. Loans sold to the two federal agencies, Freddie Mac and Fannie Mae, must cancel the mortgage insurance when the balance reaches 80 percent of the current value, giving the borrower the advantage, or disadvantage, of fluctuating property values.
Deciphering your figures

That said, the calculations get a little sticky when making the decision between higher interest rates and private mortgage insurance policies. Rather than providing you with a generic chart of estimated numbers based on the size of your loan and other factors, gather the following pieces of information and insert them into a calculator that compares mortgage insurance and higher interest rates.

Tax Bracket: Since you can deduct interest on your mortgage, your tax bracket bears greatly on the benefit of higher rates. The higher your bracket, higher interest rates become more beneficial than mortgage insurance.

Life of the Mortgage: Since tax deductions on high interest rates will be greatest in the early years, you will probably benefit more from high rates if you only plan on owning the home for a short time.

Private Mortgage Insurance Premium: Naturally, the higher the premium, the more beneficial a higher interest rate will be. Remember, premiums apply to the entire loan, but are defined as a percentage of the loan over 80 percent of the property value.

Rate Increment: This term refers to the difference between the base interest rate with PMI and the higher rate resulting from forgoing PMI.

Mortgage Insurance Termination: Typically, private mortgage insurance drops precipitously after 10 years, and lenders must cancel the insurance policy once borrowers have paid 20 percent of the original property value. Therefore, the shorter the term of insurance, the less attractive a higher rate becomes.

Still confused?

A good rule of thumb prescribes choosing PMI if you expect value appreciation and terminating PMI as soon as possible and owning the property for a long time. For short stays, a higher rate may prove a better deal.

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