Adding Insurance to a Loan

by Michael Shohoney April 16, 2009 09:55

In this entry, we are going to provide instructions on how to add insurance to almost any loan you structure using eZMath or ZMath.

First, there are two main types of insurance that eZMath and ZMath calculate.  They are mortgage insurance and credit insurance.  Generally, mortgage insurance is for use on mortgages where the loan-to-value ratio is less than 80%.  This generally happens when the borrower does not have a sufficient downpayment.  Credit insurance is an insurance coverage that is generally offered on consumer loans (i.e. auto, boat and personal loans).  This insurance has two components, life and accident and health.  eZMath and ZMath calculate both premiums.

 Let's cover mortgage insurance first.  Once you have selected a loan type, click on Options and Variations and the screen below is displayed.  Mortgage insurances are covered in FHA, VA, PMI Standard, PMI Monthly and PMI Split Premium.  FHA is insurance offered through HUD loans.  VA is a funding fee charged on loans offered through the VA.  PMI is private mortgage insurance offered through insurance companies.  Standard is the old way of calculating the insurance where the first year's premium is prepaid at closing.  The second year's premium is collected with the monthly payments beginning in the first year, etc.  You are always one year ahead in this form of insurance.  Monthly is where there is no upfront premium and you are not paid one year in advance.  Split premium is like monthly but it has an upfront premium as well.  Make sure that you select the correct type of insurance by clicking on the correct radio button as the pane that is set up on the terms screen will be determined by your selection.

When you return to the terms screen, you will see a pane that has entries which are required for the calculation of the insurance.  What you need for these entries are the correct insurance rates.  These rates are readily available from the insurance carrier that you are using (including HUD and the VA).  These rates are usually stated as a rate per hundred dollar of indebtedness.  That is how we want the number entered.  For example, a common rate for FHA renewals is 0.50 per hundred.  That is what we want entered; 0.50.  You also need to enter what year the rate for that renewal period is valid through.

In addition to the rates, you must tell the engine what the premiums are calculated on; the beginning level balance or a declining balance.  If it is on the declining balance, you must select the beginning, average or ending balance.  In the same section of the insurance terms pane, if you have an upfront premium you are asked whether any of the upfront premium is financed.  You can enter that as a percentage or dollar amount.  You also enter the number of months, if any, of premium that are escrowed.  If there are months escrowed, please click on the radio button as to whether the escrowed months are used or refunded.  You can also select a number of months of premium to be prepaid.

One of the most important entries follows.  It is the LTV Cutoff value.  You are telling eZMath and ZMath where to cutoff the collection of insurance premiums.  This is required by regulation so accuracy with this entry is extremely important.  Generally, this value will be 80 or 78.  The final entry is what the appraised (or sale price, whichever is less) value of the property is.  This is the number that the LTV will be calculated on.  Again, since this is a regulatory requirement, accuracy is extremely important.

Once your entries are made, click on calculate.  At the output screen, your Truth-in-Lending figures will reflect the collection of insurance, your payment streams will reflect the effect of insurance premiums by being added to the regular principal and interest payment amounts, a total premium figure will be shown on the output, etc.

This is how mortgage insurace is added to mortgage loans in eZMath and ZMath.  Our next entry will cover credit insurance which is a different type of insurance.  As always, if you have any troubles with this or any other aspect of eZMath and ZMath, please feel free to contact us.