Lender Paid Mortgage Insurance (LPMI) is not new to the mortgage business and if you are putting less than 20% down it may be the right solution for you.Â LPMI insurance is a single payment mortgage insurance (MI) that is funded by the lender.Â The Way this MI policy is funded is by using "back end" money to buy your policy.
"Back End" and/or "Rate Premium" funds are paid to a lender for charging a higher rate.Â Banks, Mortgage bankers and Brokers get a high amount paid to them when they charge a higher rate.Â In this case a higher rate can help you save money monthly
I recently had a borrower who had excellent credit, a 767 FICO score.Â We were able to do a 95% loan with no monthly MI premium in the payment at 5.375% vs. the rate of the day for him of 5% with standard monthly MI.Â The savings was $110/month on the payment with the higher rate.Â The difference was the monthly MI payment.
An additional benefit for this borrower is all the interest payments made at 5.375% are tax deductable, since my client made a joint income of over $100K they cannot deduct monthly MI payments on their federal taxes, LPMI had better tax consequences as well.
So when should you consider LPMI on your purchase? Â If you are putting less than 20% down payment you may want to talk to you lender about LPMI.Â You will need at least 5% of your own fund to use towards closing to qualify (the rest can be a gift).Â You will also need to have good credit to qualify.Â You lender can help evaluate your situation.Â You do need to have a FICO score above 680 to get LPMI.
You may not want LPMI if you are planning on putting large annual payments towards principle on your new home.Â The higher LPMI rate will stay with you throughout the life of the loan; the monthly MI can go away when you pay your loan down to 80% so your loan would have a lower after it is paid down.Â
The decision to LPMI will depend on your situation, are you going to make extra principle payments? Â In the example above my borrower obtained a 95% loan on their new home it will take approximately 9 years of standard payments to get to 80%, in 9 years my client will have saved $11,888 in monthly MI payments.Â If you are mobile in your carrier of if you do not plan on being in your house for over 9 years LPMI would make sense.
Bottom Line â€“ you and your lender should communicate your needs and design the best solution for you based upon your needs.Â LPMI may be the right solution; itâ€™s worth talking to your lender about when buying your new home.
The Valeo-Croy Team -Â (704) 366-7711
Todd Croy - NMLO license #91428
Deanna Valeo - NMLO license #91421
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@ The Valeo-Croy Team, we are here for you.
The Valeo-Croy Team and Cunningham and Company Mortgage Bankers are Equal Housing Lenders.