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Should I pay private mortgage insurance out of pocket or finance the cost?

Q: We are trying to determine the best course of action to pay for mortgage insurance. We can pay the insurance out of pocket (we have the funds), about $3,160, and get about 4 percent interest on the loan of $213,750. Or have the mortgage insurance rolled into the loan with an interest of about 4.375 percent. I'm getting conflicting thoughts and am interested in a recommendation.

A: For the most part, this is a discussion about time. You should compare the total costs of the difference in the two interest rates over your given time horizon.

To do so, you'll want to use HSH.com's Tri-Refinance refinance calculator. You can compare paying costs out-of-pocket, building them into the loan amount (called a low cash-out refinance) or trading them off for a slightly higher interest rate.

Paying them out of pocket today provides a lower rate. That lower rate translates into savings over time. The question is "When do I get my money back and actually start to save?" The difference in the interest rate at your loan amount produces a monthly payment difference of about $46.75 per month. At that rate, and on a simple "payback" basis, you'll get your money back in about 67 months.

However, the lower interest rate has additional benefits beyond the simple difference in your monthly payment. You'll pay considerably less interest at 4 percent than at 4.375 percent over time and actually own more of your home sooner. After 10 years, for example, you'll have spent $84,820.74 in interest at 4.375 percent and still owe $170,504.02; at 4 percent, that would be only $77,107.73 and $168,400.71 respectively. In essence, you'll have spent $3,160 to get back $7,713.01 in interest plus $2,103.31 in equity, putting you $6,666.32 ahead once your $3,160 outlay is subtracted.

Run your own calculations and compare different time scenarios to meet your needs.

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