Mortgage borrowers struggling to scrape up the cash needed to settle on their homes can now defer several hundred dollars of expense by rolling private mortgage insurance premiums into their home loans and financing the fees over the lives of their loans.
At least three major private mortgage insurers have introduced premium payment plans within the past year that allow borrowers to finance the cost of insurance in a lump sum without appreciably raising their monthly payments.
"This is a pretty basic and fundamental change in the way mortgage insurance is purchased," observed John Ciresi, senior vice president of the Washington area PaineWebber Mortgage Finance office.
The Mortgage Guaranty Insurance Corp. (MGIC), the country's largest issuer of mortgage insurance, first introduced its "MAGIC Plus" financing plan on a limited basis in January and at least two other insurers followed suit shortly afterward. However, lender interest in offering the plans to borrowers didn't perk up until last month, when a major secondary mortgage market company announced its willingness to buy the piggybacked loans.
Consequently, mortgage insurers now expect the single-premium finance plans to take off.
"I would be surprised if, in the long term, it didn't become the majority of our business," said William Osterhout, vice president of marketing and communications for General Electric Mortgage Insurance Cos. with respect to its plan, called "Front End-Zero." G.E. Mortgage ranked second in the country for insurance business written last year.
When the downpayment on a conventional (nongovernment-insured) mortgage is going to amount to 20 percent or less of the purchase price, lenders typically insist upon a 15- to 30-year private mortgage insurance policy.
Although the borrower pays for the policy, the insurance company only covers claims made by the lender for any losses incurred in the event the borrower defaults.
Until now, most borrowers have paid for one year and two months' worth of mortgage insurance in cash at closing along with other up-front settlement costs. For example, on a $100,000 mortgage with fixed payments for 30 years, at 10 percent interest and with a 10 percent downpayment, the first year's premium for 15 years of coverage in the Washington area would amount to $500. The subsequent renewal payments would total $340 a year ($28.33 a month) during the second through 10th years of the loan and $290 ($24.17 a month) for the 11th through 15th years. The total outlay equals $5,010.
The same loan insured under one of the new financing plans does away with the up-front cash payment, yet the monthly payments roughly parallel the renewal payments under the annual premium plans. The total premium drops to $2,950 because the lender receives it in a lump sum from the loan proceeds at closing. In lieu of paying the premium in cash, the borrower's monthly payment goes up by $31.70 for 15 years.
The total outlay comes to $5,706, but the $2,756 in interest payments is tax deductible, whereas there is no interest to write off under the annual premium plans.
"We have pretty sophisticated borrowers around here, and if he can get a tax advantage out of his premium, he's going to consider it," said Jim Capps, manager of Kissell Mortgage Co.'s Annandale office. Kissell offers the MGIC Plus plan to borrowers.
The single premium finance plan is partly a "response to high premiums," said Stephen L. Blose, MGIC's residential marketing program manager. "It's really for people short on cash but high on ambition to get a nice house," he said.
Most mortgage insurers will refund part of the single premium if the borrower repays the mortgage early. Under the MGIC Plus plan, for example, borrowers get back 56 percent of their money if they prepay in the third year and 48 percent by prepaying in the fourth year, according to Ciresi.
PaineWebber uses both MGIC and G.E. Mortgage for its mortgage insurance business.
The country's third-largest insurer as of last year, Verex Assurance, does not make refunds because it has priced its "Easy Single Premium" plan a "little less expensively" to account for the possibility of repayment, according to its president, Fred Reichelt. Borrowers who plan to stay in their homes six to eight years come out ahead because of the additional savings, he said.
The single-premium concept is nothing new, but the ability to finance it is. Consequently, this kind of payment option was largely overlooked.
Reichelt estimated that for the past 10 years, single payments have amounted to only 2 percent to 3 percent of Verex's business, and then it was generally used by builders willing to pick up a buyer's closing costs.
Borrowers can also finance the first year of the annual premium plans, but that approach tends to save little money, according to mortgage insurers.
Taking advantage of the new premium financing plans will require some legwork on the part of the borrower or the borrower's real estate agent to discover which lenders use which insurers, a choice made at the lender's prerogative.
The time to ask is before the loan application is taken; otherwise, the identity of the insurer usually is not mentioned until the closing.
Borrowers making 5 percent downpayments will probably have to take the conventional route of paying for their mortgage insurance in cash for the first year and in monthly installments thereafter.
G.E. Mortgage is the only one of the insurers offering a financed premium on a loan with a 5 percent down payment, but only on mortgages with terms of 15 years or less.
Some mortgage insurers exclude refinanced loans from among those eligible for the financing plans. Most do not offer it on investor or second-home loans.