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If your down payment on a home is less than
20 percent of the appraised value or sale price, you must obtain
mortgage insurance.
Mortgage insurance sometimes is referred to as private
mortgage insurance, or PMI, to distinguish it from FHA and VA insurance,
which are run by government programs. The cost of mortgage insurance
varies depending on the size of the down payment and the loan, but
it typically amounts to about one-half of 1 percent of the loan.
With mortgage insurance, the borrower pays the premiums,
but the lender is the beneficiary. The coverage protects lenders
against the borrower's default. If a borrower stops paying on a
mortgage, the insurance company ensures that the lender will be
paid in full. Mortgage companies pick insurance providers for their
customers, but the borrowers have to foot the bill. Usually, they
do so in monthly installments. But some lenders offer programs whereby
the borrower pays the entire insurance premium in a lump sum at
closing.
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| By the numbers ... 80-10-10
plan |
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| If we compare the
purchase of a $150,000 home under the 80-10-10 plan to
a standard fixed mortgage including mortgage insurance,
we find that the former is $35.36 cheaper each month. |
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| Here's how it
works: Under the 80-10-10 plan, the 10 percent down
payment on a $150,000 house is $15,000. The first mortgage
is $120,000 at 7 percent, which comes to a monthly payment
of $798.36. The second mortgage for $15,000 has a 9 percent
interest rate, making a monthly payment of $120.69. The
total monthly payment for both loans is $919.05. |
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| With a $15,000 down
payment, one mortgage of $135,000 at 7 percent has a monthly
payment of $898.16, plus mortgage insurance of $56.25,
making a total payment $954.41. |
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Chapter 3: What determines your mortgage payment?
