Premiere Mortgage Services Inc. - Dana Bain

Why pay PMI when you dont have to Dana Bain Premiere Mortgage Services Inc

January 17th, 2017 7:37 PM by Dana Bain

More and more borrowers today are looking for ways to finance their home purchase without making a full 20% down payment. As FHA continues to increase fees, many are turning to private mortgage insurance (PMI) combined with a conventional loan.

To the surprise of many homebuyers, there is more than one way to obtain PMI. One of those PMI alternatives is called Lender Paid Mortgage Insurance, or LPMI.

What is Lender Paid Mortgage Insurance?

Lender Paid Mortgage Insurance is a form of PMI that is paid for by the lender via a one-time fee, rather than by the borrower monthly. Some form of PMI is required whenever a borrower puts less than 20% down on a conventional loan.

The term “Lender Paid Mortgage Insurance” is a bit misleading, however. The lender does not pay the borrower’s mortgage insurance premium out of the goodness of its heart. Rather, the lender raises the interest rate on the mortgage to generate enough profit to pay the mortgage insurance company the required one-time fee.

The party who ends up paying the cost of LPMI is ultimately the borrower, since it’s the borrower’s interest rate that is increased. For this reason, LPMI is sometimes referred to as Single Premium mortgage insurance.

The reason it is often called “lender paid” is that the borrower is not allowed to pay the one-time premium directly out of their own funds. The funds must come from the lender, or from another party, such as the builder or seller.

Some lenders offer a PMI option where the borrower pays the one-time premium out of their own funds. This is known as either Borrower Paid Mortgage Insurance, BPMI, or Borrower Paid Single Premium mortgage insurance. If you want to buy out your own mortgage insurance to avoid the LPMI rate increase,  ask your lender about their BPMI programs.

How Does LPMI work?

What’s not readily apparent to homebuyers is that the higher the interest rate on your mortgage, the more profit is available to the lender. So, let’s imagine that you accept an interest rate on your mortgage that is 0.50% higher than market rates. The rate increase generates an extra $5000 in profit on that loan.

Let’s also imagine that a PMI company agrees to accept a one-time payment of $5000 in lieu of receiving a monthly PMI payment from the borrower.

The lender could opt to take that extra $5000 in profit and essentially prepay the PMI premium. The borrower ends up with a higher rate, but no monthly mortgage insurance fees.

Is LPMI better than FHA?

Federal Housing Administration (FHA) loans have been a great tool for homebuyers over the past few years. If not for FHA, many would be locked out of homeownership. However, FHA is increasing fees again as of April 1, 2013, to steady its troubled financial position. LPMI might become a more attractive option.

It’s true that the interest rate on an LPMI loan would be higher than an FHA loan. But FHA has very high monthly mortgage insurance costs, and also an upfront fee of 1.75% of the loan amount. FHA mortgage insurance negates any savings from a lower interest rate.

Still, FHA may be a better option for some homebuyers. FHA allows for as little as 3.5% down, compared to LMPI’s 5% down requirement. FHA also allows for more seller contributions toward closing costs. Leniency from FHA means a lot less out-of-pocket expense for FHA borrowers.

In addition, borrowers can qualify for an FHA loan with a lower credit score.

As shown in the chart below, each borrower would have to analyze their available funds, their monthly payment tolerance, and their credit rating to opt for LPMI or FHA.

Payments and Out-Of-Pocket Expense: LPMI vs Monthly PMI vs FHA

Which mortgage option comes out on top? Let’s look at an example of a $250,000 home purchase.

 

LPMI 5% down

Monthly PMI 5% down

FHA 3.5% down

Credit Score

740

740

680

Loan Amount

$237,500

$237,500

$245,471 (includes 1.75% upfront fee)

Interest Rate & APR

4.0% (APR 4.053%)

3.5% (APR 3.948%)

3.25% (APR 4.798%)

Principle and Interest Monthly Payment

$1133

$1066

$1068

Monthly mortgage insurance

$0

$132

$269

Estimated Monthly Taxes and Insurance

$268

$268

$268

Estimated Total
Monthly Payment

$1401

$1,466

$1,605

Estimated Total Cash Needed to
Close the Loan

$17,870

$17,831

$14,070

LPMI seems to come out on top based strictly on monthly payment. But that’s not the whole story. LPMI has its advantages as well as disadvantages depending on other factors.

LPMI Advantages

  • Homebuyers can put as little as 5% down on a home, rather than the standard 20%, yet avoid monthly PMI
  • The initial monthly payment for LPMI loans is often lower than that of monthly PMI or FHA financing
  • When rates are low, homebuyers can get a great rate despite the LPMI rate hike
  • Those who qualify for monthly PMI probably also qualify for LPMI
  • As FHA costs increase, LPMI will become cheaper in comparison.

LPMI Disadvantages

  • Your interest rate remains higher through the life of the loan.
  • With monthly PMI, you can cancel monthly PMI when your loan reaches 80% of the home’s value.
  • A fairly high credit score is needed to qualify for LPMI
  • LPMI requires higher out-of-pocket costs than FHA
  • LPMI is not offered by every lender

Ask Yourself: How Long will I Keep this Mortgage?

Even though the monthly payment on an LPMI loan might be cheaper initially, it might cost more than monthly PMI if you keep your loan for 30 years. This is because you can cancel monthly PMI when your loan reaches 80% Loan-to-Value (LTV), but you can’t lower your LPMI interest rate at any time without refinancing. Let’s look at a cost comparison of a person who keeps their mortgage for 10 years and 30 years. All scenarios assume a 5% down payment:

 

LPMI
after 10 years

Monthly
PMI after 10 years

LPMI
after 30 years

Monthly
PMI after 30 years

Interest Rate & APR

4.0% (APR 4.053%)

3.5% (APR 3.948%)

4.0% (APR 4.053%)

3.5% (APR 3.948%)

Lifetime MI cost

$0

 $11,801

$0

$11,801

Principle and Interest Payments

$1133 x 120 months: $135,960

$1066 x 120 months: $127,920

$1133 x 360 months: $407,880

$1066 x 360 months: $383,760

Total Principle, Interest, and
PMI costs

10 years: $135,960

10 years: $139,721

30 years: $407,880

30 years: $395,561

Should You Choose LPMI?

The main benefit to LPMI is simply lower monthly payments at the beginning of the mortgage, when you’re first starting out on your homeownership journey. It’s also nice to know that you won’t be seeing that pesky mortgage insurance payment on your statement each month for the first 7-10 years of your mortgage. It’s a great program for those who want a low monthly payment and don’t mind a slightly higher interest rate. Ask your mortgage professional and see if a loan with Lender Paid Mortgage Insurance is right for you.

All PMI scenarios based on $250,000 purchase price and value, 5% down, 740 credit score. 30 year fixed rate 1st mortgage with principle and interest payment. FHA scenario based on $250,000 purchase price and value, 680 credit score, 3.5% down. Mortgage payments rounded to the nearest dollar.

When can I remove private mortgage insurance (PMI) from my loan?

Answer: To remove private mortgage insurance you must be up to date with your monthly payments. And you have to reach the date when the principal balance of your mortgage is scheduled to fall to 80 percent of the original value of your home.

To remove private mortgage insurance (PMI) that you pay on your mortgage loan, you must be up to date with your monthly payments. These rules apply to mortgages closed on or after July 29, 1999. Federal law generally provides two ways for you to remove PMI from your home loan: canceling PMI or PMI termination.

http://www.consumerfinance.gov/askcfpb/202/when-can-i-remove-private-mortgage-pmi-insurance-from-my-loan.html

 

How To Contact Us

By Phone: 978-422-2311 (Office)
  1-800-480-0545 (Toll Free)
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By Fax: 978-422-2313 (Fax)
By e-mail:Dana@BainMortgage.com
Address:PREMIERE MORTGAGE SERVICES INC.
11 Malvern Hill Rd
Sterling, MA  01564-2829


 

Posted in:General and tagged: PMI LPMI FHA
Posted by Dana Bain on January 17th, 2017 7:37 PM

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