April 2, 2010 in Mortgages

Dear Dr. Don,
Is it worth paying a $6,000 one-time private mortgage insurance fee to get 90 percent financing? While our credit ratings are excellent, our house appraised low. We could borrow 80 percent, but that means finding 20 percent to pay off the existing loan. The other option is a 90 percent loan if we pay for mortgage insurance.

We were offered the deal if we paid all the insurance at closing. It seems like that amount of insurance is an easier pill to swallow than taking money out of a money market, an individual retirement account or stocks. We are both retired and I am beginning required minimum distributions out of my IRA this year.
— Harry Homeowner

Dear Harry,
The potential downside to paying a one-time premium at closing (instead of monthly premiums) comes if you choose to sell the home or refinance, or if you would have paid less by making monthly PMI payments. Since rates aren’t likely to go much lower, you won’t be refinancing this loan at a lower rate. That leaves the other two concerns: how long you plan to be in the house and how long the monthly payments will last.

Monthly PMI payments don’t last forever, just until the loan-to-value drops below 78 percent to 80 percent.

The Mortgage Professor has a calculator at his Web site called “Comparing Two Fixed-Rate Mortgages” that will allow you to run the numbers for you on the two types of mortgage insurance (i.e, one-time payment vs. monthly payments).

Another consideration is the deductibility of the mortgage insurance premium on your taxes. The Bankrate feature “Deducting private mortgage insurance payments” provides an overview.

Talk to your tax professional about the possible benefits of front-loading the premium in 2010. That could be the deciding factor in front-loading your PMI.

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