Home Ownership: Getting More For Less

You have been seriously thinking about buying a home. How much of your cash should you spend toward the down payment? Are there any advantages to investing the least amount possible toward the equity?

A low down payment allows you to:

• Afford to purchase a home
• Choose from a wider price range of homes
• Retain cash to invest elsewhere
• Retain cash to spend on home furnishings or improvements
• Retain cash for college tuition or emergencies
• Receive larger mortgage interest tax write-offs on a larger loan amount.

The problem is lending regulations require a minimum 20 percent down payment to purchase an owner-occupied single family residence. Do you have to wait until you save what may seem like an impossible amount of cash to purchase your dream home or use all of your savings?

Private mortgage insurance companies have removed the obstacle of the 20 percent down payment by offering a type of guaranty. The mortgage insurance policy offsets the increased risk represented by the borrower's lower equity while protecting the bank from losing money in the event of a foreclosure.

Therefore, your down payment can be as low as 3 percent of the sales price. The bank lending you the money for your home purchase will order a default policy from a private mortgage insurance company.

You pay for the policy by selecting a payment plan when you apply for your mortgage. Currently, three payment options are available -- Annual Renewal, Single Premium and Monthly Plans.

• The Annual Renewal Plan has a one-time lump sum initial premium paid by you in cash at your closing and a smaller renewal premium collected in your monthly mortgage payment.
• he Single Premium Plan has a larger one-time lump sum but no renewal is collected in your monthly mortgage payment. This one time premium is either paid by you in cash at your closing or financed by adding it to the mortgage amount borrowed from the bank.
• The Monthly Plan is currently the most popular and does not have an initial lump sum premium. You pay a monthly fee which is included in your mortgage payment.

For example, you are purchasing a $150,000 home, putting $15,000 down (10 percent) and borrowing $135,000. This transaction would require mortgage insurance but allows you to purchase the home for $15,000 less than would be required by the 20 percent minimum down payment lending regulation.

To pay for the private mortgage insurance policy required for purchasing the home in this example, your premium payment choices would be:

• $810.00 due in cash at your closing and $38 per month added to your mortgage payment (Annual Renewal Plan);
• $3,982.00 due in cash or financed at your closing (Single Premium Plan) or;
• $44.00 per month added to your mortgage payment (Monthly Plan).

The insurance policy is renewed annually and may potentially remain in your payment for the life of the mortgage. However, you may request that the lender cancel your policy when the equity of your loan is paid down to 80 percent of the property value.

If you are entitled to VA (Veterans Administration) benefits or if there would be additional advantages for you to use FHA (Federal Housing Authority) lending, the down payment requirements are even less. Both agencies also require default insurance, which is provided by a government program rather than through the private enterprise system.

All in all, private mortgage insurance makes it possible for the dream of home ownership to become a reality for a greater number of people.

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