Vail Daily column: More options exist for structuring loans
LPMI is a mortgage industry acronym for “lender paid mortgage insurance.” While the option to use lender paid mortgage insurance 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 Federal Housing Administration, Department of Agriculture or Veterans Affairs) or from a public or open market funding source, mortgage insurance is required on any transaction in which 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.
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.
options for payment
However, there are many ways in which that premium can be structured. Mortgage insurance premiums can be paid as a one lump sum cost 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.
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 lender paid mortgage insurance options available, the increased interest rate is roughly 0.125 percent to 0.25 percent higher than what the rate would be without the premium which in most cases is the least expensive means available.
Structuring the loan
Further analyzing the numbers, let’s assume a loan amount of $300,000. A one-time 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, then 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 0.62 percent would add an additional $155 per month.
By structuring the loan with lender paid mortgage insurance, 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. Beyond the simple math of the scenario, there are many variables that contribute when 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 email@example.com.