Charlie Dickerson sat in my office, his arms crossed in a don’t-try to-change-my-mind posture.
“I am NOT paying any damn mortgage insurance,” he said for the third time. We had been discussing the purchase of his first home. He had managed to save up enough cash for a 10% down payment and closing costs on a $350,000 home and was about to have his Realtor© make an offer.
“Charlie,” I said, “if your down payment is less than 20%, the lender won’t give you the money without mortgage insurance. They consider it too risky. Besides: it’s only half a percent each month, and you can get it taken off once your equity hits 80%.”
“Nope,” he said firmly. “Not doing it. I pay my bills on time, and if those banks don’t want my money, well, to hell with ‘em!”
“How about this,” I suggested. “We can get your house with a 10% down payment and no monthly mortgage insurance at all—ever. Would that work for you?”
Charlie uncrossed his arms and leaned forward. “Yeah,” he said. “That I’ll do. What’s the catch?”
There was no catch. Although it is true that lenders require mortgage insurance (MI) any time there is a down payment lower than 20%, there are alternatives to the common MI programs. What I suggested to Charlie was Single Premium Insurance. For his $350,000 purchase he planned to make a $35,000 down payment (10%) and get a loan of $315,000. The monthly MI premium would be .49%, or $128 a month. Since he didn’t want to do that, we arranged for a single payment of $5,700 to cover the MI for the life of the loan. The premium was financed into the loan, so he didn’t have to come up with the cash. Charlie was happy.
There are also hybrid options, called “Split MI.” Just as a borrower can pay points on his loan to reduce the interest rate, he can also pay a fee up front to reduce the monthly cost of MI. For a 90% loan, paying .5% up front reduces the monthly premium to .31% from .49%. Paying 1% drops it further, to .18%. That would reduce the monthly MI to $47.25 per month instead of $128.
It is still important to keep in mind that you don’t have to pay mortgage insurance forever. Once your loan to value ratio hits 80%, the lender must remove the MI (as long as you have made your payments on time). In the case of Charlie’s $350,000 house, if it appreciated at 6% per year, he would reach the 80% loan to value point in 18 months. I showed him that by getting the MI removed in 18 months, he would pay a total of $2,300 in premiums rather than the $5,700 single premium. I advised him to swallow his pride and pay the monthly. He agreed, if somewhat reluctantly. He saw it as taking over $3,000 away from the MI company in premiums he wouldn’t have to pay them.
Now that the real estate market is showing some modest appreciation, buyers with smaller down payments can cut their costs of ownership early without having to go through a refinance.
Even the curmudgeonly Charlie Dickerson the can get behind that.