Newspaper article St Louis Post-Dispatch (MO)

Mortgage Insurance Rates Make Protection Expensive

Newspaper article St Louis Post-Dispatch (MO)

Mortgage Insurance Rates Make Protection Expensive

Article excerpt

After falling out of favor with banks and borrowers in the 1980s, private mortgage insurance has more than tripled in the past three years, spurred by a surge of first-time home buyers.

Borrowers often are required to buy the insurance, which protects the lender in case of a default, if they make a mortgage down payment of less than 20 percent. But home buyers may not realize how much they are paying for the insurance.

"Generally, it is very expensive, with interest rates approximating those of credit cards," said Paul S. Marshall, a professor at Widener University in Chester, Pa., and an authority in real estate finance.

Premiums depend on the size of the down payment and the length of the mortgage. Generally, the bigger the down payment, the smaller the premium. And premiums usually are lower for fixed-rate and 15-year mortgages than for adjustable-rate mortgages and 30-year loans.

The premium for a mortgage with 10 percent down might be 0.40 percent of the total loan in advance and 0.34 percent each subsequent year until the loan balance falls below 80 percent of the home's sale price.

Thus, someone who puts $10,000 down and borrows $90,000 for a $100,000 home will pay $360 in mortgage insurance initially and $306 a year, or $25.50 a month, until the loan balance falls below $80,000.

Though the payments seem small, the accrued costs are not trivial, said Marc Eisenson of Elizaville, N.Y., who publishes The Banker's Secret Bulletin, a financial newsletter.

Even if a house's value appreciates 3 percent a year, someone who puts 10 percent down on a $100,000 home will pay $1,278 in mortgage insurance over three years before the mortgage balance falls below $80,000.

As Eisenson calculates, it is the equivalent of 12 percent interest on the $10,000 that the borrower lacked for a down payment. Here's how. The $1,278 is $426 a year for three years, or a 4. …

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