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

Your mortgage payment: Introduction

Understanding how your mortgage payment is calculated will help you know just what you can afford to pay each month.

Your mortgage payment is affected by many factors. In this chapter, we'll show how your credit score is considered by lenders and what you can do to improve it before you shop for a mortgage. The amount you put down on your home will affect other aspects of your mortgage, but there are programs for you even if you have a small down payment. We also discuss private mortgage insurance and points -- which also affect your mortgage payments.

Necessary paperwork for a buyer

Mortgage lenders may require proof of your assets, income, credit quality and other financial information.

Here are some documents you may want to gather in case the lender needs them:

What you'll need

• Federal tax returns and W-2 forms from the past two years. • At least one recent paycheck stub showing your name and Social Security number, the name and address of your employer, and your year-to-date earnings (some lenders will want the most recent month's worth of paycheck stubs). • Proof of other income: a second job, overtime, commissions/bonuses, interest and dividends, Social Security disbursements, VA and retirement benefits, alimony and child support. • List of creditors, including credit card issuers, student loans, car loans, child support and alimony. You may be asked to show proof of your minimum monthly payments and total balances, too. • Investment records: mutual fund statements, real estate and automobile licenses, stock certificates and proof of other investments or assets. • Canceled checks showing mortgage or rent payments. • Home sales contract, including the purchase price, if you've found the house you want to buy.

Not all lenders and loan programs will require all of this documentation, and borrowers with very strong credit scores may need to provide little or any of it. But having it handy may save valuable time during the application process.