Lender paid mortgage insurance? The lender pays the mortgage insurance? That sounds awesome! Sign me up.
As you may have been told time and time again, there is no such thing as a free lunch. That is true in this case as well - - but...it is worth the time and the space to discuss how lender paid mortgage insurance works and to note, that many times it is less expensive than traditional mortgage insurance.
First, what is lender paid mortgage insurance? As you may or may not know mortgage insurance is an invention of the lending industry that allows borrowers to put less than 20% down on home purchase transactions, thereby allowing more people to become home owners. I don't know if any of you have noticed, particularly if you have kids, but saving money is becoming more and more difficult all the time. For a young family or a young couple starting out, the ability to save 20% for a down payment is about as feasible as flying to the moon in many cases. So the ever creative folks in the banking and insurance industries came up with the idea that the borrower could pay a monthly premium that insures the lender for the amount of money between 80% and 100% of the value of the property so that if for any reason there is a default, they can recover some or all of that shortfall.
With government loans what amount to mortgage insurance may be referred to as a funding fee in the case of USDA and VA, or an upfront MIP (mortgage insurance premium) in the case of FHA. Both USDA and FHA also have monthly fees that are included in the payment. The main difference between the government monthly fees and conventional mortgage insurance is that the government monthly fees remain on the loan for the life of the loan, whereas with conventional products the mortgage insurance will fall off when the loan to value is at 78%.
So, the loan product that we will be addressing today is the conventional mortgage - - the 5%, 10%, and 15% down loan. Lender paid mortgage insurance takes the place of traditional mortgage insurance in your payment.
Back to the old adage about the free lunch. It's not that lenders are picking up your mortgage insurance because you have a nice face or because you are a lovely person. Lenders pick up the mortgage insurance because in actuality you are paying for it - - in the interest rate.
What! I pay for it in a higher rate??? Yes you do. But, that isn't all bad. When I advise buyers between lender paid mortgage insurance and traditional mortgage insurance I take a look at several factors:
1) How long they plan to be in the home
2) Credit score
3) How much is being put down
4) total loan amount
Let's take a look at a couple of examples:
Example A: Borrower plans to be in the home no more than 7 years, has a credit score of 735, is putting 10% down on a $140,000 30 year fixed rate mortgage. Let's do some math.
There we go, much better.
The interest rate today for the LPMI at the characteristics listed above would be 4.375%
The interest rate if one was using traditional mortgage insurance would be 4.25%
The difference in the principal and interest payment is $11.00 per month-so for the seven year period the total cost of the difference between the two payments would be $924.00 So that is the cost of the LPMI scenario.
If you used the traditional MI the payment per month would be $51.33 in mortgage insurance. Over the same 7 year period the cost to the borrower would be $4,311.72 Hmmm - - that is enough to take a look at LPMI isn't it? The advantage to the borrower decreases as time goes on as the traditional mortgage insurance will drop off the loan eventually-but for the first seven years it is a really good deal.
Lets look at another scenario: Borrower plans to be in the home at least 15 years. His credit score is 680 and his loan amount is $95,000. He is putting 5% down. How does that work out for him?
His interest rate due to a lower credit score and loan amount will be 4.75% on the LPMI. If he was to obtain traditional mortgage insurance his interest rate would be 4.375%. The difference in his monthly principal and interest payment is $21.00 - - but - - when you add in the mortgage insurance of $70.46 per month and compute it until it drops off in eleven years there is a cost of $9300. The cost of the difference between the two principal and interest payments for the fifteen years he plans to remain in the home is $3780.00. Still a better deal than keeping the traditional mortgage insurance until his equity allows it to drop off. If he kept the mortgage for 30 years, the difference in the principal and interest payment would only total $7560.
As we head into spring and higher interest rates, these calculations may change but it is worth running the scenario to see what benefits the borrower the most.
Lender paid mortgage insurance, not such a bad deal after all.
No comments:
Post a Comment