Mortgage Insurance is one of those necessary evils in purchasing a home with less than 20% down payment. The purpose of Mortgage Insurance is to protect the lender against the possibility of default. Yes, this is something you pay but does not have any real benefit to you (except to allow you to buy a home and to get into the market when you do not have 20% down). Not many homeowners are aware that you have options in how you can pay Mortgage Insurance on Conventional loans.
There are three options: “Borrower-Paid Mortgage Insurance” (BPMI), “Lender-Paid Mortgage Insurance” (LPMI), and “Split MI”.
I will review the first two, BPMI and LPMI, along with brief pointers on the advantages and disadvantages. For both options, our illustration will review a $400k purchase price with 5% down payment ($20k) and a middle FICO score of 740 or greater. The loan amount is $380k. I will be reviewing only the mortgage payment and Mortgage Insurance; not property taxes, homeowners insurance or HOA dues since those items have no bearing on the kind of program you select. I will not be reviewing Split MI because it there are four separate options within this option and because it still usually makes more sense to go with either BPMI or LPMI.
Borrower-Paid Mortgage Insurance
This type of mortgage insurance is paid by you on a monthly basis. The mortgage insurance is collected monthly along with the mortgage payment, paid to your service provider.
Current 30 Year Fixed, 95% LTV, 740+ FICO, single-family home, purchase with BPMI is 4.25% with no points (APR
Mortgage Payment: $1869.37
Monthly Mortgage Insurance (.62% factor): $196.33
TOTAL: $2065.70
Lender-Paid Mortgage Insurance
There is no separate monthly MI that you pay. The MI is absorbed into the interest rate; therefore, the interest rate will be higher (essentially, you are financing the MI).
Current 30 Year Fixed, 95% LTV, 740+ FICO, single-family home, purchase with LPMI is 4.625% with no points (APR
Mortgage Payment: $ 1953.73
Monthly Mortgage Insurance: 0
TOTAL: $ 1953.73
If you are taking a look at these two options and comparing, then LPMI makes more sense. Not every lender or bank offers this, so it’s good to know you have options and to ask your mortgage professional if this is something they can do.
Not all scenarios may work in favor of LPMI savings money – for instance, if your credit score is on the lower end of the spectrum, or if your loan amount is high-balance (above $417k), then it may make more sense to go with Borrower-Paid MI. But do ask your lender if they offer options in MI and to run an “apples-to-apples” scenario for you so that you can make an informed decision.
Another consideration is potential tax savings between the two options that you may want to discuss with your tax advisor. Since mortgage interest is usually tax deductible and Monthly Mortgage Insurance is only tax deductible in some cases, you may ask your tax professional for a comparison of what makes more sense for you.
