PMI is one of those elusive mortgage terms that few people truly understand. PMI, or Private Mortgage Insurance, is put in place to protect a lender in case a borrower fails to pay their mortgage. Not everyone is required to carry PMI when taking out a mortgage. It is only necessary for mortgages with a balance at or above 80% of the purchase price or 80% of the home’s appraised value in the case of a refinance.
The most common type is Borrower Paid Mortgage Insurance (BPMI) which results in a monthly insurance premium being added to your mortgage payment. Another, less commonly known type, is Lender Paid Mortgage Insurance (LPMI) which is funded by the lender up front and is factored into the loan in the form of a higher interest rate.
Although neither PMI option may sound particularly attractive, they are often some of the few viable options for potential homeowners who don’t have a 20% down payment to use for their home purchase.
The LPMI Advantage
There are a few advantages of LPMI as opposed to BPMI including a potentially lower monthly payment and better tax advantages. Since your mortgage insurance premium is being funded up front by your lender, you will not have a monthly premium added to your mortgage payment. Although you will have a slightly higher rate, the impact to your monthly payment is typically not as substantial as a mortgage insurance premium would be, resulting in a lower monthly cost.
Depending on your income level, BPMI may not be tax deductible, whereas interest payments on a mortgage with a higher rate and LPMI will be tax deductible for the life of the loan.
Is LPMI for Me?
LPMI is not the right option for everyone. To be eligible for LPMI you must have a good credit score, contribute at least 5% of your own funds as a down payment, and will likely reap a greater tax benefit if you are a high income earner. Lender Paid Mortgage Insurance is most attractive to borrowers who have a shorter loan term or who plan to move or refinance within 10 years. The reason being that LPMI cannot be cancelled. You are locked into a higher mortgage rate for the life of your loan, whereas Borrower Paid Mortgage Insurance can be cancelled once you reach a loan-to-value ratio (LTV) of 80% or it will automatically terminate once you reach a loan-to-value ratio of 78% or below. With that being said, LPMI is a great option for you if your loan is at or above 85% LTV.
LPMI Savings Scenario
- $275,000 Mortgage Loan Amount
- 90% Loan-to-Value Ratio
- High credit score, quality borrowers
When deciding what route to take when purchasing a home, work closely with a mortgage lender to determine the most financially beneficial course of action based on your unique situation. Be sure to look into LPMI as a viable solution for you to obtain your dream home! To get preapproved and discuss your options, contact your FNB Fox Valley mortgage lender today at 920-729-6900.