South Orange County Blog from Bob Phillips

Want to Buy a House With a Low Down Payment?

Posted in home affordability, Home buying, Household Finances, Mortgage Rates, Pending Home Sales, Real estate by southorangecounty on November 12, 2012

Here is a solution from one of my favorite lenders:

No Monthly Mortgage Insurance Payment

Fannie Mae and Freddie Mac require mortgage insurance (MI) on all loans greater than 80% loan-to-value. Many would be buyers dislike the notion of mortgage insurance as it adds hundreds of dollars to their monthly payment. In addition, the added monthly payment of mortgage insurance requires higher income for qualifying. 

Rather than have a monthly premium the MI companies also allow the MI to be paid in one lump sum at closing. This is known asBorrower Paid MI Single Premium. The cost is approximately the same as 4 years of the monthly premium the borrower could opt for. Buyers with smaller down payments usually do not have the extra money needed in order to pay the single premium at closing. 

Here is a great solution to the issue of not wanting the monthly MI payment but not having the thousands of dollars to pay the up-front premium. The borrower can take a higher interest rate which allows the lender to use the rebate paid to the lender for delivering the higher than market interest rate into the secondary markets. Just as a borrower can pay points for a lower interest rate, the borrower can receive points back on a higher interest rate for closing costs and MI premiums up-front. 

Note: The cost of the higher interest rate is lower than the cost of the monthly MI payment! 

The higher the loan-to-value the more expensive the MI premium is whether it’s the monthly MI payment or the cost of the single MI premium. Here are some examples with a sales price of $350,000. 

LTV                     Mo. MI               Pmt. increase          Mo. Savings

90%                         $116                          $44                              $72

95%                         $163                          $70                              $93

97%                         $229                          $95                             $134 

As you can tell from this chart, the less the borrower has to put down, the greater the savings are by selecting to take a higher interest rate and eliminate the monthly MI. Usually after 5 years the MI can be removed thus ending the monthly MI payment. However, the interest on the loan is tax deductable and qualifying is easier with a lower monthly payment.

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Let me know if you’d be interested in such a program, and I’ll give you the lender’s info.

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