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Lower mortgage payment by buying insurance up-front

A sign for a newly-constructed home advertises a

A sign for a newly-constructed home advertises a financing rate in Chagrin Falls, Ohio. (Oct. 15, 2009) Photo Credit: AP

Mortgage borrowers looking to cut down on monthly payments may find that making a single, upfront purchase of mortgage insurance is a good way to achieve this goal. Going this route, you won't have to pay every month for private mortgage insurance, or PMI.

This sort of arrangement is available on a conventional mortgage loan that requires private mortgage insurance, if you have less than 20 percent to put down for a down payment. It is not available with government programs such as FHA-insured loans, VA or USDA loans. Now that FHA insurance premiums have gone up, conventional loans look more attractive to many borrowers, making the single-payment PMI a more viable approach.

According to Christian Durland, a senior mortgage adviser with Envoy Mortgage in Centennial, Colo., "Eight times out of 10, if you run a proper analysis, the single-premium mortgage insurance always comes out as the less expensive option as long as you are going to be in the home for three or more years."

On a $200,000 mortgage with a 10 percent down payment, private mortgage insurance typically costs about $81.67 a month. With single-payment mortgage insurance, the borrower instead would pay an upfront premium of 1.37 percent, or $2,740. The total monthly payments would exceed the upfront premium two months shy of three years, for a break-even period of 34 months.

Paying for mortgage insurance upfront helps to reduce the debt-to-income ratio (the percentage of monthly income that goes toward debt payments). Lower debt-to-income means some borrowers can qualify for bigger loans. "If you are looking at a payment of $243 a month, that's equivalent to upwards of $50,000 in purchase price. Those are big numbers, especially for today's homebuyer," says Scott Sheldon, a senior mortgage loan officer with W.J. Bradley Mortgage Capital in Santa Rosa, Calif.

Making a one-time, upfront mortgage insurance payment saves the hassle of refinancing if there is no other rationale, Durland says. For example, if you have enough for a 15 percent down payment, you could put 10 percent or 12 percent down instead, pay for upfront PMI, and not have to watch your home's value to cancel monthly mortgage insurance after your equity exceeds 78 percent.

For borrowers who plan to sell their homes or refinance their mortgages within two or three years, a single upfront insurance payment would not offer a cost-saving benefit.

The additional upfront cost is another deterrent for a lot of borrowers. Bob Walters, chief economist with Quicken Loans, says, "If you are in mortgage insurance, by definition, you don't have a ton of equity in your home and that payment is likely going to be an issue. So people don't readily have money lying around that they can write a check to make that go away."

However, you could apply gift money that you get from family, or a seller concession, toward this expense.

If you are looking to go the single-payment insurance route, shop around to find a lender that embraces this PMI option. Not all lenders do.

Ask the loan officer to compare costs of monthly mortgage insurance versus single-payment mortgage insurance if you divert some of your down payment money for the latter. For example, how much would you pay for monthly mortgage insurance with a 12 percent down payment, and how much would upfront mortgage insurance cost if you made a 10 percent down payment? What would be the break-even period?

A final wrinkle to consider: It is unclear whether PMI will continue to be tax deductible in the future. Under the Tax Relief and Health Care Act of 2006, mortgage insurance premiums are tax deductible for qualifying homeowners. That deduction expires at the end of 2013. Congress could extend the mortgage insurance tax deduction, but lawmakers have had trouble agreeing to anything.

Mortgage rates have been little changed the week of Dec. 12 after they had jumped as a result of stronger-than-expected growth in the labor market.

The 30-year fixed-rate mortgage was 4.55 percent, the same as last week.

The 15-year fixed-rate mortgage fell 2 basis points to 3.6 percent. A basis point is one-hundredth of 1 percentage point.

The average rate for 30-year jumbo mortgages, or generally for those of more than $417,000, fell 2 basis points to 4.55 percent.

The 5/1 adjustable-rate mortgage rose 1 basis point to 3.34 percent. With a 5/1 ARM, the rate is fixed for five years and adjusted annually thereafter.

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