Mortgage insurance in generally required when a borrower is in need of a loan that is greater than 80 percent of the home’s value. This insurance protects the lender in the event the borrower cannot make payments and defaults on the loan. This is also referred to as PMI or Private Mortgage Insurance. Mortgage insurance is based on both loan-to-value (LTV) ratio and the borrower’s credit score.
Some borrowers may wish to avoid mortgage insurance payments each month, however it can be difficult for some borrowers to come up with the 20 percent down payment needed to do so. An alternative can be a lender-paid mortgage insurance (LPMI) option. With LPMI, instead of the borrower making a monthly insurance payment, the lender will pay the entire premium up front on their behalf. The cost of this insurance is passed onto the borrower in the form of a slightly higher interest rate.
So what does this trade-off mean and when does it make sense to seek an LPMI option? Let’s compare LPMI and borrower-paid mortgage insurance (BPMI) and see when LPMI may be a valuable choice.
When choosing LPMI, the lender pays your mortgage insurance up front for you, and you repay this cost in the form of a higher interest rate. This can often result in a lower monthly payment for the borrower, however over the life of the loan, the total amount paid can be greater than a BPMI option. For a borrower seeking the lowest possibly monthly payment, LPMI may be a good option. Mortgage interest payments are also tax deductible while mortgage insurance is not. LPMI can potentially offer a larger tax deduction than if you were to pay the mortgage insurance yourself.
It is very important to consider your ownership plans for the home you are purchasing. If you have plans of moving or refinancing within roughly 10 years, you may pay less overall during that 10 years with the LPMI option. Similarly, if you were to select a shorter loan term than a traditional 30 year mortgage, you may benefit from LPMI.
With the many factors to take into account, choosing between LPMI and BPMI can be a numbers game. It may not be clear on the surface which option is best for every situation. At West Ridge Financial, we work closely with each of our clients to help them determine if LPMI is the best choice for their individual needs. Our experienced team will review all of the information on hand to present valuable options so you can make an informed decision.
Whether you are in Roosevelt, Vernal, or Alpine, West Ridge Financial is committed to helping you find the right mortgage at a competitive rate. For more information on lender-paid mortgage insurance or to see if this option is right for you, contact us today or use our online application to get started!