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Lender Paid Mortgage Insurance
Whenever you purchase a home with a down-payment of less than 20%, mortgage insurance is most likely going to be required by your lender. Government mortgages (USDA, FHA, & VA) all have their own mortgage insurance programs, but conventional mortgages backed by Fannie Mae and Freddie Mac require private mortgage insurance (PMI) provided by one of six private mortgage insurors in the country. Is lender paid mortgage insurance a good option for you?
There are 4 different types of private mortgage insurance available:
- Monthly PMI – the borrower pays the premium in 12 monthly installments included in their mortgage payment
- Single Paid PMI – the borrower pays a one-time premium at closing as part of the mortgage closing costs and never pays it again
- Split Premium PMI – the borrower pays a smaller monthly premium in exchange for a partial (split) premium paid one-time at closing
- Lender Paid PMI – the lender pays the policy in exchange for a higher interest rate
Let’s explore the Lender Paid PMI option and figure out the pros and cons:
How does LPMI work?
As we saw above, LPMI is an acronym for Lender Paid Mortgage Insurance. However, this does not mean that it’s a free premium to you as a borrower. The mortgage lender pays a single premium for you at closing in exchange for a higher interest rate over the life of the mortgage loan, or the lender simply absorbs the risk of a lesser down-payment with the extra interest on the mortgage loan.
Your principal and interest payment will be higher with this option, but the overall payment could be lower since you’re eliminating the monthly mortgage insurance premium. In some cases, it could be much cheaper.
What are the advantages of LPMI?
LPMI can have a couple of benefits:
- The cost of the PMI is spread out over the life of the loan
- Your monthly costs could potentially be lower and more affordable
It’s important to have your lender help you determine if your monthly payment will be lower with lender paid mortgage insurance.
What are the disadvantages of LPMI?
It’s important to understand that there are some potential pitfalls with this option:
- Your interest rate is higher for the entire life of the loan, not just until you have achieved an 80% LTV. It cannot be cancelled.
- Your total cost for the mortgage may be more expensive than some of the other options.
- You may not get as many tax deductions due to changes in the tax laws. Mortgage insurance does not show as a separate line item on your 1098 form your mortgage servicer will provide you. It’s important to consult a licensed CPA to determine which option is best for your individual tax situation.
Which option should I choose?
When you look at all of the potential options that are available for private mortgage insurance, it can be overwhelming to try and decide which is best for you and your family. LPMI can be cheaper monthly, monthly can be cheaper over the long-term, and a single paid premium can be a great option if you have some extra cash. Mortgage insurance premiums can vary widely according to your credit score, down-payment, debt-to-income ratio, property type, occupancy…well you get the drift.
Determining the best fit for you can be achieved with the expertise of a local mortgage consultant. If you would like a custom analysis of your scenario, please call me today or Apply Online to get a free Total Cost Analysis and figure out what’s best for you.