Home buyers who cannot put 20% down on a home will probably need to pay for mortgage insurance. But there are different ways to get around this extra expense. Lender paid mortgage loans is a relatively new concept to home buyers but it’s popularity is soaring. Below is more information about how to do this.
Overview of Mortgage Insurance
Mortgage insurance is required on loans without at least 20% down because the home owner is more likely to default on such a loan. The monthly mortgage insurance payment ensures that the lender will be reimbursed if the home owner stops paying. This is an extra expense of $100 to $200 per month in many cases.
Some mortgage companies offer lender paid mortgage insurance or LPMI. This is mortgage insurance that the lender pays for you. But there is a catch: You need to pay a slightly bigger interest rate to make up for not paying that pesky mortgage insurance. Lender paid mortgage insurance typically gives you a .5% higher interest rate, which can add up to a lot of extra interest over the years. The LPMI option is a very popular choice for borrowers seeking a no PMI mortgage loan.
Why Consider Lender Paid Mortgage Insurance?
People may want to get LPMI because of the lower monthly payments. With a home loan with LPMI, you do not have to pay for mortgage insurance each month. Your monthly mortgage costs will usually be lower. If you have a loan for $200,000, you could save up to $60 per month with LPMI.
Second, having an LPMI home loan means you do not need a 20% down payment. Your upfront buying costs tend to be lower. If you put down 5% or less for an lender paid mortgage insurance loan, you may save thousands of dollars at the closing table on a $200,000 loan.
LPMI can make sense for higher income borrowers who can get a higher tax deduction due to the higher rate of interest. People with a lower income could be able to deduct regular PMI, so LPMI will not give you additional benefits when it comes time to file your taxes. In most cases PMI is tax deductible, so this has to be factored into a side by side comparison.
Why Would You Not Get Lender Paid Mortgage Insurance?
LPMI will always come with a higher interest rate. You will pay a bit more interest over the life of your mortgage by not paying for mortgage insurance upfront. This can add up over the life of your loan if you plan to stay there for many years. If you intend to sell your home in five to seven years, this is not as important.
Some experts say if you put down 5% or less and you are going to stay in the home for less than a decade, LPMI may make sense for you. But people who want to stay in the home for a long time will pay more over the years.
Second, mortgage interest rates are climbing. As of May 2018, mortgage rates are in the 4.5% range and they are trending higher. This means your LPMI mortgage will cost more. Be sure your mortgage lender walks you through the costs of doing LPMI as opposed to a conventional loan. Be sure you are getting a deal that works best for you in your circumstances.
Third, LPMI plays a major factor in the rate of interest you get. The lower your score, the higher the interest rate will be. LPMI can be particularly expensive for people with a credit score below 700. But if you want, you can buy down your interest rate by paying points.
If you have a high LTV near 80%, you may not want to get LPMI. You are nearly done with mortgage insurance anyway.
There are other types of loans that have a smaller down payment. One of the most popular is the mortgage backed by FHA. It only requires you to put down 3.5% for many buyers. In some cases, these loans may have a lower interest rate than LPMI. Note however: You will need to pay for mortgage insurance throughout the life of the loan. Compare FHA to lender paid mortgage insurance options.
In a conventional mortgage, the lender requires you to pay for mortgage insurance until your loan balance is below 78% of the value of the home originally. There are some ways you can speed up this process by making more mortgage payments than you are required to. It is a good idea to speak with your lender about what your short and long term financial goals are and what type of mortgage product would be the best choice for you.
The bottom line on LPMI is it can be a good idea for borrowers who will stay in the home longer, primarily. Some banks do not want you issue LPMI because it is an extra cost for the bank up front. While it is off set by the higher interest rate, for some banks, they prefer to charge buyers PMI.