Fannie Mae announced that it will offer homebuyers two options for reducing mortgage insurance costs.

One option lets borrowers qualify for a reduction in mortgage insurance costs to 1994 levels. The second offers even lower coverage costs in exchange for an additional closing fee.

The company said that savings to consumers would range from $1,100 to $2,250 during the first 10 years of a 30-year loan.

Fannie now requires borrowers with loans that have a 95% loan-to-value ratio to insure 30% of the loan. When the new options take effect, borrowers will be able to insure these loans with 25% coverage. On a 90% LTV ratio, coverage will be reduced from 25% to 17%.

The second option would enable borrowers to qualify for lower mortgage insurance in exchange for a payment at closing or a higher note rate. For a loan with a 95% loan-to-value ratio, the minimum coverage will be 18% of the loan, and for a 90% loan, the minimum will be 12%, Fannie said.

The options will take effect in early March, Fannie said. The company credited its automated underwriting systems and loss mitigation methods with reducing credit losses and making the options possible.

Fannie also said it would expand its 3%-down-payment loans by buying additional mortgage insurance from Commonwealth Mortgage Assurance Corp. and Mortgage Guaranty Insurance Corp.

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