When it comes to the words “mortgage insurance,” many people have a negative reaction because they think it is “bad.” Is mortgage insurance bad? Maybe, maybe not. Mortgage insurance is required whenever your loan amount exceeds 20% of the value of your house. But one thing that many people aren’t aware of is that if you strongly dislike the concept of having mortgage insurance on your loan, it is possible to restructure the payments using LPMI.
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What is Lender Paid Mortgage Insurance (LPMI)?
LPMI is lender-paid mortgage insurance and is normally available only on conventional loans. The idea of having lender paid mortgage insurance is relatively simple: Pay a fee up front when you get your loan or accept a higher interest rate and the lender will pay for your mortgage insurance.
And when you do the math, it is possible that getting LPMI on your loan could save you a chunk of money each month on your monthly mortgage payment.
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One of the problems with LPMI is that technically, you will be paying for the insurance; the structure of the payments simply change. Instead of normal insurance payments, you either pay a lump sum up front or you make a larger payment every month. In either instance, however, you may end up paying less than you’d pay if you got PMI separately.
LPMI Example: Conventional Mortgage Loan
Here is a simple example of what LPMI might look like for a conventional mortgage loan.
- $200,000 purchase price
- 10% down payment
- 750 credit score
- 30-year fixed rate of 4.875%
Option #1: With Standard Monthly MI
- $971 Principal & Interest
- $84 Monthly Mortgage Insurance
- $1,055 Total
Option #2: Upfront Premium Paid by Borrower or Seller is $3,574
- $971 Principal & Interest
- $84 Monthly Savings
- $9,504 10-Year Savings
Option #3: Borrower Takes a Higher Rate of .375% or 5.25% in Exchange for No Monthly MI
- $1013 Principal & Interest
- $42 Monthly Savings
When it comes to the benefits of LPMI, most people first think of the lower monthly payment, but that isn’t the only benefit of LPMI. Another benefit to LPMI is that you can actually qualify for more money since your monthly payment is less.
Is LPMI right for you? Be sure to work with your loan officer so no matter what option you choose that you are fully informed and make the best decision for your situation.
The monthly savings are dramatic and may be the difference of you qualifying for the home you want.
Any questions about using LPMI? Do you think this is a good option for homeowners?
Leave your comments below!