Mortgage insurance

If your down payment on a home is less than 20 percent of the appraised value or sale price, you must obtain mortgage insurance.

Mortgage insurance sometimes is referred to as private mortgage insurance, or PMI, to distinguish it from FHA and VA insurance, which are run by government programs. The cost of mortgage insurance varies depending on the size of the down payment and the loan, but it typically amounts to about one-half of 1 percent of the loan.

With mortgage insurance, the borrower pays the premiums, but the lender is the beneficiary. The coverage protects lenders against the borrower's default. If a borrower stops paying on a mortgage, the insurance company ensures that the lender will be paid in full. Mortgage companies pick insurance providers for their customers, but the borrowers have to foot the bill. Usually, they do so in monthly installments. But some lenders offer programs whereby the borrower pays the entire insurance premium in a lump sum at closing.

By the numbers ... 80-10-10 plan If we compare the purchase of a $150,000 home under the 80-10-10 plan to a standard fixed mortgage including mortgage insurance, we find that the former is $35.36 cheaper each month. Here's how it works: Under the 80-10-10 plan, the 10 percent down payment on a $150,000 house is $15,000. The first mortgage is $120,000 at 7 percent, which comes to a monthly payment of $798.36. The second mortgage for $15,000 has a 9 percent interest rate, making a monthly payment of $120.69. The total monthly payment for both loans is $919.05. With a $15,000 down payment, one mortgage of $135,000 at 7 percent has a monthly payment of $898.16, plus mortgage insurance of $56.25, making a total payment $954.41.

House value: $150,000 80-10-10 plan Down payment 10% $15,000 Mortgage 1 $120,000 7% $798.36 Mortgage 2 $15,000 9% $120.69 Total monthly: $919.05 Standard fixed mortgage plan Down payment 10% $15,000 Mortgage 1 $135,000 7% $898.16 Mortgage insurance + $56.25 Total monthly $954.41

Monthly difference: $35.36