Don’t figure out that lender-paid mortgage insurance is the lender will pay out your mortgage insurance and you don’t. The reality is the lender pays the mortgage insurance, indeed, but so you do. Even you have to pay higher mortgage rate. This case is similar to zero cost for refinance in which the lender will pay all closing costs but you deal with higher interest rate. Just look at the following illustration to see the difference:
Your loan amount is $100,000, LTV ratio 90%, and monthly mortgage insurance premium $52. If you take borrower-paid mortgage insurance, it will be: 3,75% x $100,000 = $ 463,12 (3,75% is a rate for a-30-year-loan). Your monthly mortgage insurance will be: $463,12 + $52 = $515,12. This amount will be totally different if you take lender-paid mortgage insurance. The rate of a-30-year-loan for this lender-paid mortgage insurance is 4%, so we can estimate a monthly mortgage insurance by (4% x $ 100,000) + $ 0 = $477, 42. You can see that the second option is cheaper in total monthly payment.
For your information, lender-paid mortgage insurance has both pros and cons. The most obvious advantage is you do not have pay your mortgage insurance premiums per month. This absolutely can decrease the amount of monthly mortgage payment. If you take this mortgage, your monthly mortgage payment will be lower since your mortgage insurance is not required anymore. This can be said that lender-paid mortgage insurance (LPMI) is a money-saver, especially for you who do not have a plan to stay in your home for a long time.
If you are interested in taking this lender-paid mortgage insurance, you have to be a qualified borrower who is able to take larger loan or to purchase more expensive. This seems so fair after seeing that your monthly mortgage insurance payments are lower. In addition, lender-paid mortgage insurance is good for high LTV ratio owners. If your LTV ratio is just or close to 80%, LPMI may not best choice.
Another benefit of using lender-paid mortgage insurance is that it’s potential for higher tax deduction. Why? Because you have paid higher interest rate per month. That’s very awesome, right?
Something with a bunch of benefits must have some weakness. Lender-paid mortgage also has some weakness. One of obvious weakness is it can’t be canceled. Next weakness, you will be trapped with higher interest rate for the rest of loan’s life. It means that there are much more interest you have to pay. From these weaknesses, it’s important to consider that you have to convince yourself about the mortgage insurance you prefer to choose. You can compare all options of mortgage insurance then determine the best enhancing your needs and financial ability.
How Does Lender-Paid Mortgage Insurance Work?
Using lender-paid mortgage insurance likely changes the main structure of insurance premiums, so that you do not pay a separated charge per month. With this type of mortgage insurance, you pay larger for both upfront mortgage payments per month. This approach is not really common compared to adjustment your mortgage rate. When you pay a sum of money, your lender will calculate and determine the amount of money that can cover the lender’s cost (because the lender is going to buy the mortgage insurance with your money). On the other hand, if you purchase over time, you will pay in higher mortgage rate.
Since the higher mortgage rate means the higher monthly insurance payment, you will end up paying with less money per month if you use this LPMI. But actually the amount of monthly LPMI is less than if you would pay if you get private mortgage insurance separately.
The Alternative over Lender-Paid Mortgage Insurance
There is good news for you who don’t really like lender-paid mortgage insurance. You still have some alternatives you can choose. The first alternative is by making larger Down Payment (at least 20%). Unfortunately, most people don’t realize this option. Second alternative is by paying your own PMI (this is often called BPMI/ Borrower-Paid Mortgage Insurance). The last alternative is by using a piggy-back loan or many people call it 80/20 loan. This type of loan lets you to avoid the mortgage insurance altogether but the second mortgage insurance will come in higher interest rate. If you are able to pay off your second mortgage quickly, you will enjoy getting lower mortgage rate for several years later.