How Is Mortgage Insurance Calculated?

If you don't have enough cash to put down on your new home to satisfy your lender's requirement, you may still be able to take out a mortgage if you also take out mortgage insurance. This insurance pays the lender a portion of your loan balance if the lender forecloses on your home, lowering that lender's risk of losing money in the event that you default. The cost of mortgage insurance is almost always directly tied to your mortgage principal.

Understanding BPS

Mortgage insurance rates are often expressed in terms of BPS, which stands for "basis points." One basis point equals one one-hundredth of 1 percent. In other words, 50 BPS equals 0.5 percent.

Mortgage Insurance Types

Mortgage insurance generally comes in the form of an annual premium, divided into 12 monthly payments each year for the duration of the policy. Some lenders, notably the Federal Housing Administration, also require up-front mortgage insurance in addition to an annual premium.

Up-Front Insurance

As of November 2010, the Federal Housing Administration charges 100 BPS, or 1 percent, of the total amount of the mortgage loan as an up-front mortgage insurance fee. You owe this amount within 10 days of closing on your new home.

Annual Insurance

Every lender sets its own mortgage insurance rate amount relative to the total amount of your mortgage. Rates vary by the length of your mortgage, the size of your down payment and sometimes even your credit score. Mortgage insurance premiums vary from 50 BPS, or half of 1 percent, to 600 BPS, or 6 percent. The average private mortgage insurance annual premium is 60 BPS, according to "The New York Times," while the average FHA mortgage insurance annual premium is between 25 and 90 BPS.

Time Frame

Mortgage insurance premiums are based on your outstanding home loan. As you pay down your loan, your mortgage insurance premiums will decrease. You need to make annual mortgage insurance payments only until you pay down your mortgage principal to a certain point, typically 80 percent of your home's value.

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