Lender Paid Private Mortgage Insurance -LPMI | A good alternative when a borrower has less than 20% down
By Ann M. Heinz, Englewood Mortgage Company
Private Mortgage Insurance (PMI) is usually required when a borrower puts down less than 20% on the purchase of a property. This insurance is payable to the lender to assist in offsetting losses should the borrower default on the loan.
Over the last few years, when a borrower was putting less than 20% down, and obtaining a conforming loan amount ($417,000 or less), the initial reaction was to try and avoid PMI or Private Mortgage Insurance. Lenders have used a first and a second mortgage combination with the second many times being in the form of a line of credit tied to Prime. If the down payment is less than 5%, lenders have turned to FHA. Choosing the first/second combination can be attributed to Prime as staying very low(3.25% currently). FHA has been an alternative with 5% down or less as the mortgage insurance on FHA was fairly low.
If PMI was used, the common product has been monthly mortgage insurance. The borrower pays a monthly fee until the loan to value on the property hits between 75% -80%. With the potential for Prime to increase in the future, second mortgages only available with 10% or more down and FHA Mortgage Insurance being raised, it is time to re-visit PMI, specifically Lender Paid Mortgage Insurance (LPMI).
If a buyer elects to split their loan into a first and a second mortgage, typically the buyer secures a line of credit tied to Prime (Prime + .5% to Prime + 2%), the rate is subject to change monthly with the Prime Rate. This option is currently only available when the borrower has 10% down. There are fixed rate second alternatives; however, the rates are normally much higher than the first mortgage.
Eventually Prime will go up and there is uncertainty as to how high Prime might increase. With monthly mortgage insurance, the borrower typically will have the monthly cost drop off after the loan to value reaches 78% or the borrower may ask the lender to remove the monthly mortgage insurance fee; however, an appraisal must be done by the lender and the borrower needs to stay on top of this. With FHA, the monthly mortgage insurance premiums have increased to 1.35% for most FHA loans, making the FHA monthly premium very expensive.
LPMI ends up resulting in a slightly higher interest rate as the lender is paying the mortgage insurance out of the profit on the loan; however, the monthly savings to the borrower is significant. By raising the rate by .125% to .25%, the lender pays the mortgage insurance and the borrower saves on the monthly payment.
Every situation is different and a blanket statement is never sufficient when addressing financing; however, for many individuals LPMI could be a very good solution. See chart below for a snapshot of mortgage insurance comparisons. Contact Ann M. Heinz – NMLS #360599 Co MB100027008 – for more information at 303.263.4003 or visit http://www.annheinzmortgageloans.com/
