In this edition of First-Timer Primer, we take a look at the ins and outs of mortgage insurance.
Basically, mortgage insurance is a way lenders insure themselves in riskier loan situations, when the borrower may be putting down less than the typical 20% as a downpayment on a home.
We reached out to Joe Zamoiski, Vice President of 1st Portfolio Lending, for an explanation of private mortgage insurance, or PMI, and of the various options available.
Mortgage insurance is typically required on all loans where a borrower cannot put down 20 percent. It’s an additional monthly fee that is included in a borrower’s total monthly mortgage payment. The factor depends on the loan-to-value (LTV, or how much the borrower is putting down as a proportion of the total) and the borrower’s credit score.
However, this ongoing monthly payment is not the only option for borrowers putting down less than 20 percent. Some borrowers can elect to choose either BPMI (borrower paid mortgage insurance) or LPMI (lender paid mortgage insurance).
BPMI is where the borrower pays a one-time fee at closing instead of the monthly fee. This fee is based on LTV and credit score.
LPMI is where the borrower elects to choose a slightly higher interest rate instead of either the one-time fee of BPMI or the monthly payment of traditional PMI. The fee to “buy out” the monthly mortgage insurance is rolled into the higher rate.
In sum, borrowers putting less than 20 percent down can either:
1.) Pay monthly mortgage insurance
2.) Use BPMI to pay a one-time fee and elect not to have the monthly payments or
3.) Use LPMI to take on a slightly higher rate and not pay the one-time fee nor the monthly payment.
If the borrower does elect the monthly mortgage insurance payment, this payment drops off after the borrower reaches 78 percent of the purchase price (in other words, when they have paid down 22 percent of the purchase price.)
For example, if a client bought a home for $300K and only put down 5 percent, the starting principal balance would be $285K. Once this principal has been paid down to $234K (78% of $300K), the monthly PMI payment comes off. Based on the borrower’s loan type (30-year fixed-rate, 15-year fixed-rate, etc.), this could take several years. This is why some borrowers electBPMI or LPMI.
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