Your Mortgage : Changes in Points and Mortgage Insurance Make Ownership Easier

A potent new financing combination--soon to be available in most marketplaces nationwide--could mean homeownership for thousands of buyers whose incomes qualify them for a mortgage, but who lack the cash needed at the closing.

The concept involves simultaneous use of two cost-cutting techniques: An option to spread mortgage insurance payments over 12 months instead of in cash up front. And a “zero-point” mortgage--that is, a home loan requiring no origination or discount fee outlays by the borrowers up-front.

Here’s how the plan works. Say you and your spouse have a joint income that easily qualifies you for this fall’s enticing rates on 30-year, 15-year or other loans.

Like large numbers of other consumers, your main barrier is coming up with money for the 5% to 20% down payment and closing charges that lenders want. Even going with 5% down--$5,000 on the $100,000 house you hope to purchase--you still come up short.

The two or three points quoted by mortgage companies will add another $1,900 to $2,850 to the price tag. (Each point represents 1% of the mortgage amount, or $950 on a $95,000 loan.) On top of those fees, you’ve got still another major outlay: the nearly $1,000 first-year premium on your mortgage insurance.

Mortgage insurance is required by virtually all lenders on loans with down payments under 20%. It protects them from loss in the event of borrower defaults leading to foreclosure. Traditionally, the premium is paid in advance the first year, and becomes part of the legal-sized page worth of settlement charges that buyers confront, from appraisal fees to surveys to title insurance premiums.

How to slash two of the heftiest of these cash gobblers keeping you out of a home? Step 1 is to tell your prospective lender or your realty agent that you want to consider using one of several competing new mortgage insurance programs that eliminate the traditional lump-sum 12-month premium requirement.

These programs essentially permit you to pay for your loan insurance month-by-month over the course of the year. It’s an installment-plan alternative. A pro-rata portion of the premium gets tacked onto your monthly mortgage payment.

On a $100,000 home, for example, one monthly premium plan would save you about $940 at settlement. Rather than bringing nearly $1,000 for mortgage insurance to closing, you’d bring just your first month’s premium, less than $60.

Five major insurers have either recently introduced such an option or intend to do so in the coming weeks. They include GE Capital Mortgage Insurance Co., which launched the first monthly pay option this summer.

Also active are Mortgage Guaranty Insurance Corp. (MGIC) and Commonwealth Mortgage Assurance Co., which both launched versions of the program in the past two weeks. Other firms readying programs for this fall are United Guaranty Corp. and Republic Mortgage Insurance Corp.

Before signing up for a monthly pay option, be aware of the downside. In exchange for the stretch-out of your payments, you’re going to be paying a little more per month. For example, in MGIC’s program, a borrower putting down 5% on a $100,000 home with a 30-year, fixed-rate loan would owe an extra $11.88 in monthly mortgage payments using the new option compared with the traditional.

Is the extra cost worth it? That’s for you to decide given the specifics of your own situation. But executives of mortgage lending firms already offering the monthly pay option say consumer reaction thus far has been overwhelmingly positive.

Timothy L. Ross, president of Ross Mortgage Corp. of Detroit, says first-time purchasers tell him that “anything that gets us into the house with less cash is more than worth the small addition to the payment.”

Officials at GE, MGIC and Commonwealth said their programs are too new to quote volume yet, but agreed that a significant percentage of cash-short buyers in the moderate price range are likely to find the initial cost savings attractive. The biggest potential savings of all, they said, come when those buyers combine monthly pay premiums with zero-point mortgages.

Zero-point deals have mushroomed in availability this year as interest rates have dropped to 20-year lows. In exchange for a slightly higher rate on your loan--say one-half a percentage point jump over the prevailing rate--lenders are willing to close loans with no origination or discount points whatsoever.

Instead of a 6 3/4%, 30-year mortgage with two points, for instance, you can get a 7 1/4% zero-point alternative. If you can qualify on household income for 7 1/4%--plus save $2,000 or more on points at settlement--why not? And when you add that $2,000 saving to the $1,000 or more saving on mortgage insurance, you need $3,000 less in cash to close on the house.

Even if you have the cash and could pay the full freight, you might ask yourself: Maybe we could use the cash to buy new furniture for the house. Or upgrade the appliances. Or put on a deck.

If you’re willing and able to pony up a little more per month, the monthly premium/zero-point combo could be for you.