When looking into financing, most borrowers want to avoid paying private mortgage insurance. Private Mortgage Insurance(PMI) is generally required on conventional loans when the loan amount is greater than 80% loan to value (meaning you have less than 20% equity in the house). The two types of mortgage insurance are Borrower Paid (BPMI) and Lender Paid (LPMI). Lets take a look at each.
Borrower Paid or BPMI
The lender charges a yearly premium paid out in your monthly payments. The average BPMI is .21 and 1.15%, depending on how much you put down and what your credit score is. BPMI can be cancelled by law. Once the balance reaches 78%, the lender is required to cancel BPMI. There are other options to cancel the the PMI at 80% loan to value.
Lender Paid or LPMI
Includes the cost of the insurance in the form of a higher rate. In exchange for covering the PMI, the lender charges you a slightly higher rate for the life of loan. It normally results in a lower monthly mortgage payment than BPMI. This type of mortgage insurance can’t be cancelled. The LPMI is usually an attractive option if you are likely to move or refinance within 7-10 years. LPMI may have tax benefits compared to borrower paid monthly which is no longer tax deductible(for tax advice, please consult a tax professional). Borrowers can generally purchase 5% more house with LPMI than with BPMI for the same monthly payment.
Keep in mind, these types of insurance should not be confused with insurance that pays off your mortgage upon death, or homeowners insurance, which protects you from losses due to such events as wind, fire, damage,etc. This type of mortgage insurance only protects the lender in case of default (non payment of the loan). Even though the borrower/buyer pays for this type of mortgage insurance- it does not protect the borrower- it protects the lender.
However,there are ways to avoid the monthly mortgage insurance cost. In addition to doing a “piggyback” loan where you get a first and second loan to avoid the mortgage insurance, you can also avoid monthly mortgage insurance costs by obtaining Lender Paid Mortgage Insurance, one of the two types of mortgage insurance we discussed above.
For more information on ways to avoid mortgage insurance and lower your monthly mortgage payment- please contact Todd Kurio, Residential Mortgage Loan Originator, firstname.lastname@example.org, 512 459 2405 NMLS#216616