Borrow Smart: 3 Options That Can Cut Your Mortgage Payment

Recently, two new low down payment options became available to home buyers: Federal Housing Association (FHA) loans with mortgage insurance that was just lowered 0.5 percent, and Fannie Mae/Freddie Mac loans with 3 percent down. But home buyers with just a little more cash to put down have other options.

Borrower paid vs. lender paid mortgage insurance

Two Fannie/Freddie private mortgage insurance (PMI) options are worth exploring at the 5-percent down payment level. Borrower paid PMI is when the mortgage insurance is a separate line item. Lender paid PMI is when your rate is higher in exchange for the mortgage insurance being built into the rate.

Here’s how a Fannie/Freddie loan with borrower paid PMI compares to one with lender paid PMI, using the example of a $300,000 purchase with 5 percent down.

 Borrower Paid PMI *   Lender Paid PMI ***
 Loan Amount  $285,000  $285,000
 Rate  3.75%  4.125%
 Payment  $1,320  $1,381
 Mortgage Insurance  $128 **  $0
 Homeowners Insurance  $100  $100
 Property Taxes  $300  $300
 Total Monthly Cost Before Homeowner Tax  Deductions  $1,848  $1,781
 Total Monthly Cost After Tax Deductions  $1,491  $1,397
* Mortgage insurance separate   **  At PMI rate of .54% for 5% down   *** Mortgage insurance built into rate

Even though the lender paid PMI loan has a higher rate, it still costs $67 less than the borrower paid PMI loan on a total monthly cost basis, and also costs $94 less after homeowner tax deductions. One key reason is because borrower paid PMI isn’t tax deductible, but when you include mortgage insurance in the rate using lender paid PMI, you have more mortgage interest to deduct at tax time.

80-10-10

To avoid mortgage insurance all together, cap your first mortgage at 80 percent of the purchase price, then add a second mortgage, called a piggy-back mortgage. Presently, most lenders require this piggy-back structure to have combined loans capped at 90 percent of the purchase price.

Therefore, the first mortgage would be 80 percent, the second mortgage would be 10 percent, and you must put 10 percent down. This is often called an 80-10-10. Here’s what it would look like for a $300,000 purchase:

 First Loan  Second Loan
 Loan Amount  $240,000  $30,000
 Rate  3.625%  4.125%
 Payment  $1,095  $148
 Homeowners Insurance  $100
 Property Taxes  $300
 Total Monthly Cost Before Homeowner Tax Deductions  $1,643
 Total Monthly Cost After Tax Deductions  $1,305

10-percent down jumbo loan with no mortgage insurance

Paradoxically, lower loan amounts require second mortgages to avoid mortgage insurance, but “jumbo” loans greater than the $417,000 Fannie/Freddie loan cap can be a single loan up to 90 percent of a home’s value.

These loans are good for higher-earning home buyers in higher-priced markets. Most jumbo lenders now allow loan amounts up to $1 million and as high as $1.25 million for exceptional borrowers. This translates into purchase price ranges of $1,111,111 to $1,388,888 with just 10 percent down and no mortgage insurance, which saves several hundred dollars per month on larger loans.

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