For people thinking of buying a home but lack a 20% down payment, you will likely have to pay for private mortgage insurance. This is an additional payment you make on top of your mortgage each month that covers the lender if you default on your home loan and that’s why lender paid mortgage insurance has become so popular.
Many home buyers do not like the idea of paying for private mortgage insurance, also known as, PMI. If you cannot pay 20% down, another option is to have the mortgage company pay for your mortgage insurance. This is known as lender paid mortgage insurance or LPMI.
Here are some good reasons to consider lender paid mortgage insurance, as well as some things to think about before you make your decision.
#1 You Can Avoid Paying PMI
If you decide for lender paid mortgage insurance, your lender is going to pay your PMI as a lump sum and pass on the cost to you with a slightly higher interest rate. With LPMI, you may pay ¼ to ½ a point higher on your interest rate. But it can be either higher or lower.
Experts in the industry say that LPMI is not that different than leasing a car. You can make a monthly payment on it, or you could have a onetime payment and receive a discount for doing so.
So, let’s say that you want to buy a house worth $200,000 and you only have $20,000 to put down, or 10%. You would usually need to make PMI payments in addition to your mortgage payment.
If you have a 720 credit score, you would need to pay $66 per month for PMI roughly. With a 4.5% rate fixed on a 30 year mortgage, the monthly mortgage payment would come out to $913. You would be paying about $979 per month with PMI.
But if you get lender paid mortgage insurance, your rate would be 4.625%, and your total payment would only be $925.
Keep in mind that your private mortgage insurance premium can be higher or lower based upon your credit score.
#2 Tax Advantages
Taking lender paid mortgage insurance is useful at tax time because you cannot tax deduct PMI payments, but you can tax deduct lender paid mortgage insurance payments. So, the higher rate that you are paying with LPMI is tax deductible.
In previous years, PMI has been deductible on taxes, but at this time it is not. The industry hopes that this is changed soon.
Many mortgage lenders have started to offer the lender paid mortgage insurance option because consumers like the idea of paying less for PMI and having it built into their payment.
#3 May Be Cheaper Than FHA Insurance
Some borrowers are opting for LPMI more often if they are getting an FHA loan. FHA insurance, which is called MIP or Mortgage Insurance Premium, has been going up in price in recent years. Some find that they can pay less for their mortgage insurance by having the lender pay the full price of it up front for them.
FHA mortgage are an excellent product, but the potential downside is paying higher mortgage insurance costs.
#4 You Can Qualify for More
If your monthly payment is lower, you may be able to qualify for a bigger house. Having a lower payment means you will have a lower debt to income ratio so you can get a larger loan if you want it.
There are a number of considerations to think about with lender paid mortgage insurance.
First, you will have a higher interest rate for the life of your loan. Or, at least, you will have the higher rate until you refinance. But if you have PMI that you pay yourself, your insurance payments will be dropped when you have 20% equity in your home.
Some experts say that there is a lot to think about if you want the lender to pay your private mortgage insurance. While you will often have a lower overall payment with LPMI, you are going to be paying a higher interest rate. They say that if you plan to stay in the home for many years, you could want to get the lowest rate you can and just pay PMI.
However, if you intend to sell the home in a few years, you could be better off by paying lender paid mortgage insurance.
Note that you also can reduce the cost of your lender paid mortgage insurance. You can buy down the rate by paying points when you close. This way, you can pay the very same interest rate as you would have without having the LPMI rate hike. You also can check if the seller will buy down the rate to make it a better deal for you.
Another option is to have the lender pay only part of your mortgage insurance up front, and not the entire amount. In this scenario, you would make a payment each month on PMI, but that would be lower than the full payment.
As we hope we have made clear by this time, there is no clear cut answer on whether you should pay lender paid mortgage insurance or PMI. There are many scenarios where either situation will work well for the home buyer.
For many Americans, paying for lender paid mortgage insurance makes a lot of sense simply because the payment is $50 lower each month or more. That alone makes it an attractive option for many home buyers.
We recommend that you carefully crunch the numbers of what your lender offers regarding lender paid mortgage insurance, and make your decision. Some lenders may not even offer the LPMI option, but we are seeing it more often today.