Get The Lender To Pay Your PMI?

July 31st, 2012

When someone says the words: mortgage insurance, most people have a negative reaction because they think paying mortgage insurance is a waste of money. Most people, of course, always think they are qualified well enough, and should not have to pay PMI (Private Mortgage Insurance). But most people don’t realize the low down payment loan they need would not even exist without PMI, so maybe its not as evil as first imagined. Another thing that people do not realize is that there is an option to get the lender to pay for the PMI. It is called LPMI, which stands for Lender Paid Mortgage Insurance. This is available only on Conventional loans, not on FHA nor VA loans, you must pay the mortgage insurance on those loans. The concept of LPMI is simple, you pay a fee up front when you get your loan or accept a higher interest rate and the lender will pay for your mortgage insurance. Most people opt for the higher rate.

Whether or not you should take an LPMI option really depends on how long you plan on owning the home and how much down payment you put down initially. Why would you pay a higher rate to get rid of the PMI up front, when you can potentially get rid of the PMI in as little as 2 years? There is more on dropping PMI here.

Once you take a higher rate through the LPMI program you have that higher rate for life. But PMI you do not have for life, you can potentially drop it at some point if you meet all the requirements and meet the equity requirements, by doing what is called a PMI drop. But the decision really depends on if you think you will be in the place for the short haul or the long haul? If for the long haul, paying the PMI and getting a lower rate is likely best. Let’s look at it over time and assume you will live in the place for 10 years and do a 10% down payment on a $612,000 sales price with a 10% down payment which equals a loan of $550,800:

*The below interest rates are illustrative only.

Loan with LPMI:
1st 10 years:
4.25% with no PMI
$2709/month mortgage payment
$0 PMI
$325,080 total payments over 10 years

Loan with PMI:
1st 10 years if you do not drop PMI (which you will):
3.875% with PMI
$2590/month mortgage payment
$307 PMI
$347,640 total payments over 10 years

Clearly the LPMI option works best if you never were to drop the PMI. But you will likely drop PMI at some point, with appreciation and by paying the loan down. Let’s look at what happens if you drop the PMI after year 3, after a 10% down payment, with the help of¬†appreciation and principal pay down. After 3 years your loan balance will be about an 85% loan-to-value if the place does not go up in value at all, and all you did was pay down the normal amount of principal. So all you need is appreciation of 1.7% a year over the first 3 years to get another 5% equity, to have an 80% loan-to-value, or 20% equity. You may even drop the PMI faster if the appreciation is higher, or if you do any equity enhancing renovations. Below is how it breaks down, and we’ll use 3 years to be more conservative:

1st 3 years:
3.875% with PMI
$2590/month mortgage payment
$307 PMI
$104,292 total payments over 3 years
Years 4 thru 10 at 3.875% with PMI dropped:
$2590/month mortgage payment
$0 PMI
$217,560 total payments for years 4 thru 10.
Total payments over 10 years: $321,852

So you can see the loan with the lower rate that includes the PMI is best in the long run. But if you think you may sell in the short run, like 5 years? 3 years? Then maybe the higher rate LPMI option is the way to go. Or if you plan to live there a while, and then maybe keep it as a rental property and may have the home forever, then definitely consider taking the lower rate and drop the PMI later.

Of course, if you only put down a 5% down payment, it may take until year 4 or 5 to drop the PMI, so maybe an LPMI loan is better in this case. And the PMI is more costly for a 5% down loan than a 10% down loan, which may be another reason to do an LPMI loan in that case, as opposed to a 10% down loan where paying PMI may be better because you are all the closer to dropping the PMI because of the higher down payment.

As you can see it all depends on how long you think you’ll own the place, your rate of appreciation, if you make any pre-payments, if you do any renovations, and what your initial down payment is. The bottom line is that you should have your lender run the numbers showing you several different scenarios so you can accurately determine what the best loan structure for you is.

Brian Martucci is a loan officer for Capital Bank Mortgage, a division of Capital Bank. He has been in the mortgage industry since 1986 and has served in a number of roles, including loan processor, loan officer, mortgage broker, branch manager, and vice president. Brian Martucci – NMLS# 185421. His opinions do not necessarily reflect the opinions and beliefs of Capital Bank Mortgage or Capital Bank.¬†Capital Bank, N.A.- NMLS# 401599. Click here for the Capital Bank, N.A. “Privacy Policy”.

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