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I'm considering purchasing a house, but I'd like to put as close to 10% down as possible, so I still have money left after the down payment for closing costs and for renovations and repairs. Unfortunately, the cost of paying PMI is pretty steep.

I've seen occasional and tantalizing references (e.g. on BankRate and Mortgage Professor) to something called Single-Financed Mortgage Insurance. Instead of paying a monthly premium for four or five years, your lender purchases mortgage insurance as a single one-time purchase when you take out your mortgage, and then adds that single premium payment to the balance of your loan. From what I understand, this is cheaper for the same reason that paying your entire auto or renter's insurance premium in the beginning of the year is cheaper than paying monthly - because there are no installment charges or finance fees charged by the insurance company. Additionally, the cost of the PMI is spread out over the entire life of your mortgage instead of concentrated in the first four or five.

My mortgage payments would therefore be slightly higher than with monthly PMI, but in the scenarios I ran, they're about $30 higher per month, as opposed to the $200 that conventional monthly PMI would cost me - so I'm still saving a lot of money on a monthly basis. Some of these plans also include a rebate provision, so that if your home reaches 80% LTV ahead of time (because of prepayment or a higher appraised value), you can ask your lender to rebate you back any remaining PMI premiums.

This seems exactly perfect for us, but I don't see many references to it on the Internet or in mortgage books/articles. Is it a service that's not often available, or is it just something that's not well-advertised but easily taken advantage of?

  • what happens if you refinance or sell the house in a year or two? Does the unused portion of the bulk premium get refunded? Can you deduct the PMI payments? That deduction is set to expire but has already been extended several times. – mhoran_psprep Aug 29 '13 at 13:17
  • I'm unsure of what happens if I sell or refinance early - that's the kind of information that I haven't been able to find. Unfortunately, I don't qualify for the PMI deduction. – bill Aug 29 '13 at 13:29
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    You understand it's $30 because you are paying it over the term of the mortgage, 30years, I assume, instead of the 5 or so years you'd actually have to pay PMI. If you tried to save to 20% down, how long would it take you? Last, it would help if you listed all the numbers. I can show you the true cost of what you're trying to do. – JoeTaxpayer Aug 29 '13 at 13:51
  • Sure, I explained in the question that part of the reason the monthly payments are lower is that the premium gets spread out over 30 years. It would take me at least another year to get to 20% and still have a reserve after that. – bill Aug 29 '13 at 15:55
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There are few different types of MI you can choose from, they are:

  • Borrower-Paid Monthly (this is what most people think of when they think MI)

  • Borrower-Paid Single Premium (you may have QM issues on this)

  • Lender Paid Single Premium

  • Split Up-front and Monthly

The only way to determine which option will ultimately cost you less is to come up with a time estimate or range for how long you anticipate you will hold this mortgage, then look at each option over that time, and see where they fall.

To answer your question about the single-premium being added to your loan, this typically does not happen (outside of FHA/VA). The reason for that is you would now have 90%+ financing and fall into a new pricing bracket, if not being disqualified altogether. What is far more typical is the use of premium pricing to pay this up-front premium. Premium pricing is where you take a lender credit in exchange for an elevated rate; it is the exact opposite of paying points to buy down your rate.

For example: say a zero point rate is 4.25%, and you have monthly MI of say .8%. Your effective rate would be 5.05%. It may be possible to use premium pricing at an elevated rate of say 4.75% to pay your MI up front--now your effective rate is the note rate of 4.75%. This is how a single premium can save you money. Keep in mind though, the 4.75% will be your rate for the life of the loan, and in the other scenario, once the MI drops off, the effective rate will go back down from 5.05% to 4.25%. This is why it is critical to know your estimated length of financing.

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