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Mortgage Basics  Chapter 3: Your mortgage payment
Your monthly principal and interest charges are determined by the rate and the amount of the loan.
 
   
Your mortgage payment

Mortgage insurance
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Pay more interest
Some lenders will waive the mortgage insurance requirement if the buyer accepts a higher interest rate on the mortgage loan. The rate increase generally ranges from three-quarters of a percentage point, or 75 basis points, to a full percentage point, depending on the down payment. A basis point is one-hundredth of 1 percentage point. Borrowers can benefit from this because mortgage interest is tax-deductible, whereas mortgage insurance premiums aren't. But they'll end up paying more interest over the lives of their loans due to the higher rates.

Use an 80-10-10 loan
This program involves getting two loans. The borrower gets a first mortgage equal to 80 percent of the sale price, a second mortgage for another 10 percent of the price and puts the remaining 10 percent down at closing. The second mortgage has a higher interest rate. But since it applies to 10 percent of the total loan, the monthly payments on the two mortgages can still be lower than the monthly payment on one home loan with mortgage insurance. Plus, interest on the second mortgage is tax-deductible. The 80-10-10 loan isn't the only plan available; borrowers can get 80-15-5 loans or other combinations.

By the numbers ...
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.

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.

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.

-- Posted: May 1, 2006
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