If you don’t have 20 percent down to buy a house these days, you will be paying mortgage insurance of some kind.
Mortgage insurance just helps the lender have reassurance in case you default on the loan, and it can add a hefty price sometimes onto your monthly loan bill. However, there are options in mortgage insurance out there, and one of them that can help you if you are in a pinch for money. It’s called the lender paid mortgage insurance (LPMI).
“In essence, it is wrapped into the interest rate. But you have different options with this type of insurance,” says Jeremy David Schachter, branch manager and mortgage advisor at Pinnacle Capital in Phoenix. “There are advantages and disadvantages to going this way.”
Your mortgage lender pays the mortgage insurance premium in a lump sum upfront. He/she forwards that cost to you with a higher interest rate on the loan – which usually would be about a quarter of a percentage point – he says.
“But remember that the mortgage insurance won’t fall off once you get to 20 percent. It was already put into the loan, and you pay for it continually until you sell or refinance,” Schachter says.
Choosing this direction can be a good choice depending on how long you will stay in your home.
“If you are an older couple and this is your final home, lender paid mortgage insurance might not be the way to go,” he says.
Some of the situation where it could be a good thing includes: you plan on refinancing in a few years; you are getting a short-term mortgage; you need a smaller monthly mortgage payment; and you desire a bigger tax deduction.
If you want to head toward the borrower-paid mortgage insurance, then the best scenarios can include: you will stay in your home a long time; you will choose a long term mortgage; you believe the home’s value will increase; and you decide on higher monthly payments so you can cancel the insurance as you reach the 20 percent down payment figure.
Lender-paid mortgage insurance does have the advantage that you will have more interest to write off on your taxes*, Schachter says. Taxpayers who itemize their tax deductions and have paid or accrued mortgage insurance premiums on any contract written after January 1, 2007 are eligible to deduct insurance premiums, subject to certain income restrictions.
But despite any of the other advantages, most people just want a lower payment.
“I’ve been doing this for 15 years, and some people just want the lowest payment possible. That’s all that matters to them. But some people want the lowest rate even though the payment would be lower with a slightly higher interest rate. Each individual has their own house psychology,” he says.
A quarter percent higher can make some people cringe, he says.
Schachter actually closed on a mortgage for his own second home recently, and chose lender-paid mortgage insurance.
“For my situation, I was worried about the lowest payment. Eventually, I want to refinance. But to get to 20 percent equity, it might take me awhile. Home values are going up a little in this area, so I might make that quicker than I thought,” he says.
The interest rate you get in situations like this has a lot to do with whether you have a high credit score and how much down payment you can contribute.
Here’s an example from Schachter of a lender paid mortgage insurance versus monthly mortgage insurance premium:
$225,000 purchase, 10 percent down with a 740 FICO score
Monthly mortgage insurance at 3.875, with APR of 4.2375
Lender paid mortgage insurance at 4.125 percent, APR 4.213
“The rate was .25% higher on lender paid mortgage insurance. All that interest is rolled into the interest rates, so there isn’t any mortgage insurance in the payment. The savings was $107.00 per month compared to the borrower paid mortgage insurance,” he says.
If this borrower had chosen the borrower paid mortgage insurance, the monthly fee would have been $125 added on per month to the principal and interest.
*This site does not give tax advice. See your tax professional for tax-related recommendations.