A new twist on private mortgage insurance gives homeowners a chance to get back some of the premiums they pay.
Lenders usually require PMI to cover their risk when a mortgage exceeds 80 percent of a home's price - adding about $108 a month to a $180,000 loan.Some borrowers have ducked PMI with a cheaper "80-10-10" arrangement: a mortgage for 80 percent of the price, a 10 percent cash down payment and a second mortgage (often with a 15-year term) for the remaining 10 percent.
Now mortgage-insurance companies have come up with attractive alternatives to 80-10-10 packages. With "financed-premium" plans, available from many lenders, you make monthly payments in the same ballpark as for 80-10-10s.
The lump-sum cost of the mortgage insurance is rolled into your loan, modestly boosting your monthly payment.
What sets the new plans apart is that you are eligible for a refund of a hefty part of your premium if you sell the house, refinance or persuade the lender to drop your PMI. Another plus: You might still qualify for a home-equity loan or line of credit - tough to get if you already have a second mortgage as part of an 80-10-10.
Here's how the two strategies would compare if you purchased a $200,000 home and made a $20,000 down payment:
- If you chose an 80-10-10, you might have a first mortgage of $160,000 at 7 percent for 30 years and a second mortgage of $20,000 at 8.5 percent for 15 years. Monthly payment: $1,261.
- With the Financed Single Premium plan offered by Mortgage Guaranty Insurance Corp., a $4,230 mortgage-insurance premium would be added to your $180,000, 7 percent loan balance, for a total mortgage amount of $184,230. Monthly payment: $1,226.
Assume that at the end of five years you either move or refinance. You would have paid about $2,100 less with the mortgage insurance, and you would be eligible for a refund of 40 percent of your premium ($1,692). Refunds are based on how long you use the mortgage insurance. One year after closing, you're eligible for an 81 percent refund; two years after closing, you could get back 65 percent.
An 80-10-10 could still be the better choice if you pay off the second mortgage quickly, or if it keeps your loan amount below the threshold for "jumbo" loans, which boost your interest rate by up to half a percentage point.