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Vail Daily column: An enticing option for mortgage insurance

William A. DesPortes
Mortgage Matters

LPMI is a mortgage industry acronym for “lender paid mortgage insurance.” While the option to use LPMI to one degree or another has been around for some time, mortgage lenders and mortgages banks are now offering more enticing and viable options for structuring loans where they pay the mortgage insurance premiums. In order to fully understand the option, it is best to start from the beginning, if you will.

Whether it be from a private or government entity (the FHA, USDA or VA) or from a public or open-market funding source, mortgage insurance is required on any transaction where there is less than 20 percent equity or down payment. There are options emerging once again where a second lien or a second mortgage can be used in lieu of mortgage insurance, but that is a topic for another column.

Potentially Risky Business

By definition, mortgage insurance is an insurance policy which compensates the primary mortgage lender of a loan for losses due to a default on the loan. Those loans with less than 20 percent equity are deemed to be more risky and require the additional insurance. As with any insurance policy, there is a cost to the individual, and this is the point where most borrowers lose interest. While they are glad to be able to purchase or refinance a home with less than the 20 percent equity or down payment, they are not thrilled about the additional costs of the insurance premium.

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However, there are many ways in which that premium can be structured. Mortgage insurance premiums can be paid as a one lump sum costs at closing; or they can be paid in a separate monthly payment which may be able to be eliminated once a certain amount of equity is accrued. Case in point here, the payment can be structured as a lender paid mortgage insurance premium.

Paying the Premium

Admittedly so, the term lender paid mortgage insurance is misleading. Make no mistake about it, the borrower is still going to pay for the premium. But let’s analyze the numbers. Paying the premium as one lump sum due at closing will be around 2 percent of the loan amount. Separate monthly payments can be hefty and calculated somewhere between .5 percent and 1 percent of the loan amount. Lender paid mortgage insurance is achieved when the premium is paid with a slight increase to the interest rate. Technically the lender charges a higher interest rate, and they then take care of the premium. In the current environment and with current LPMI options available, the increased interest rate is roughly .125 percent to .25 percent higher than what the rate would be without the premium which in most cases is the least expensive means available.

Further analyzing the numbers, let’s assume a loan amount of $300,000. A onetime fee to cover the mortgage insurance at 2 percent would be $6,000 additional due at closing. If the fee were paid as a monthly premium, a ball park rate on a 30 year fixed rate mortgage would be 4 percent which would carry a monthly payment of $1,432.25, but the mortgage insurance premium calculated at a ball park rate of .62 percent would add an additional $155 per month.

Find Good Guidance

By structuring the loan with LMPI, the estimated interest rate would increase to 4.25 percent, making the total monthly mortgage payment $1,475.82 with no additional mortgage insurance fees or payments.

Past the simple math of the scenario, there are many variables that go in to deciding the best means of structuring a mortgage insurance premium. Each scenario is different but each scenario requires the guidance of a seasoned mortgage professional.

William A. DesPortes, of Central Rockies Mortgage Corp., can be reached at 970-845-7000, ext. 103, and william@dsmortgage.org.


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