Making the Mortgage Insurance Purchase Decision

September 2006
Journal of Financial Planning;Sep2006, Vol. 19 Issue 9, p66
Academic Journal
This paper examines the options for home buyers who are unable to satisfy the 20 percent down payment often required by mortgagees and who may be required to buy private mortgage insurance (PMI). It introduces a relatively simple framework to analyze mortgage options from the consumer's perspective. It develops a set of testable results for five mortgage choices that a consumer might make. Choices compared include 10 percent down and monthly PMI payments, 10 percent down and a single PMI payment, and a "piggyback" mortgage of 10 percent down with another 10 percent as a 15-year second mortgage. For a standard 30-year mortgage with fixed rates ranging from 5 to 9 percent, the home buyer's optimal option for minimizing the effective interest paid depends on the expected life of the mortgage. Mortgagors who expect to own their home for less than five years should consider mortgage insurance paid monthly. Mortgagors with a time horizon of over five years should consider single-premium mortgage insurance. But the best option for all time horizons is the piggyback mortgage.


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