A leading mortgage insurer announced on Wednesday a new premium-payment plan that will significantly reduce the closing costs for consumers.
GE Capital Mortgage Insurance Corp., Raleigh, N.C., said the plan will allow borrowers to pay a one-month insurance premium at the closing, rather than the customary 12 months of premiums.
Fannie Mae and Freddie Mac, the giant secondary-market agencies, have agreed to buy loans carrying the insurance.
The new payment plan, along with acceptance by the agencies, could give GE an edge in marketing its mortgage insurance, at least temporarily. Competing insurers are already eyeing the product closely.
Saving of 9% to 22%
GE estimated that the program could reduce closing costs by 9% to 22%.
Private mortgage insurance is generally required on loans with down payments smaller than 20%. In the event of a default, the insurer pays the lender.
On a $100,000 loan with a 5% down payment, closing costs would typically run to about $2,770, including mortgage insurance, according to GE.
A year's mortgage insurance on the loan comes to $570, which most insurers want to be paid immediately. But with the monthly premium, the buyer would be asked for only $51 at the closing, bringing the costs down to $2,251.
After the initial payment, the borrower would pay monthly premiums as part of the mortgage payment. Extending the payments would increase the cost of the insurance by $36 for the year, GE said.
Martin Heck, president of the GE unit, said technology was the key element in making the plan possible. It will be available only to lenders that have computer-to-computer access to GE Capital Mortgage.
This will allow automated processing of the payments, a prerequisite for the plan.
Mr. Heck said there was no increased risk to the insurance company because the monthly payment structure would provide an "early warning system" if a borrower falls behind. This would allow GE Capital Mortgage Insurance to counsel the borrower and work out a payment plan.
An executive at another mortgage insurance firm said the plan was interesting and could open up home ownership to a new class of borrowers -- those who had the necessary income to make monthly payments but could not quite muster the down payment.