From NYTimes.com 11/6/14
Private mortgage insurance is the bane of home buyers who can’t put down at least 20 percent. The insurance protects the lender in the event that a borrower defaults on a property with little equity, but it also guarantees a considerably higher monthly mortgage payment.
An increasingly popular alternative allows borrowers to buy out of that monthly burden, however. With single-premium mortgage insurance, the borrower makes one lump-sum payment upfront.
The single premium can be paid as part of the closing costs or financed into the loan. Many lenders are also using lender credits or premium pricing to pay for the single premium, said Norman T. Koenigsberg, the president and chief executive of First Choice Loan Services in East Brunswick, N.J. In this case, lenders pay the upfront premium, and charge the borrower a slightly higher interest rate to cover it.
One advantage is that borrowers can qualify for a larger loan amount this way because their monthly debt burden will not include a mortgage insurance premium, Mr. Koenigsberg said. That makes the single-premium option especially popular in competitive housing markets where sellers are asking buyers to present their highest and best offers, he noted.
He estimated that two-thirds of First Choice loans requiring mortgage insurance are now using single premium.
“The premium amount has a direct correlation to the borrower’s credit profile, but it’s not different than it would be on a standard mortgage insurance product,” Mr. Koenigsberg said.
John T. Walsh, the president of Total Mortgage Services in Milford, Conn., said that about half the clients requiring mortgage insurance are going with single premium. The primary attraction, he said, is that even though the lender-paid product carries a higher interest rate, the borrower’s monthly payment is still lower than it would be with monthly premiums tacked on.
“People who need mortgage insurance don’t have a lot of money for a down payment,” Mr. Walsh said, “and they are usually looking to minimize their monthly payment.”
He offered an example of the monthly savings for a borrower with a 760 credit score who is financing all but 5 percent of a $300,000 home purchase. If the borrower paid for insurance monthly, the payment on a 30-year loan at 3.99 percent would be $1,558.50. If the borrower chose lender-paid insurance, the interest rate would rise to 4.25 percent, but the monthly payment would still be $82 lower, at $1,476.
Over time, that savings adds up. But there is a down side, Mr. Walsh said. Borrowers with lender-paid insurance pay the higher interest rate as long as they have the loan, whereas those paying monthly premiums can ask to cancel the insurance and stop paying once their equity equals 80 percent of the original value of their home.
“The important thing is, the more options to consumers the better,” said Brian M. Gould, the chief operating officer of the United Guaranty Corporation, a private mortgage insurance provider.
In deciding which way to go, borrowers should discuss the pros and cons of each with their loan officer, Mr. Gould advised. They should consider how long they are going to keep the mortgage — if not more than two years, then monthly is probably better than paying the larger premium upfront, he said.
People who just want to keep their monthly payment as low as possible may instead want lender-paid, especially with interest rates so low, he added. It can provide a tax benefit for some people, since the premium is essentially in the higher interest rate, and is therefore deductible.