This entry was posted on Thursday, October 4th, 2007 at 9:41 am and is filed under PMI. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
Why It Pays to Check Out Lender-Paid Mortgage Insurance
Mortgage insurance, or PMI, has had an unfair rap ever since the media grabbed the topic 10 years ago and beat the life out of it. Every client thereafter spit out the same warning when we met.
I don’t want PMI!
Ok, I get it. So, most of us started doing the 1st/2nd combo loans that eventually became so popular. Structure an 80% 1st , put a 2nd behind it for the rest….and presto, no MI! And we’d still be doing them now except that those high CLTV 2nds are mostly gone.
There are times however when PMI, or MI as we now call it these days, makes more sense. And years ago, Congress required lenders to remove MI after 20% equity could be proven with an appraisal. Values were rising so quickly then that MI could typically be shed after a couple of years.
Last year tax deductible mortgage insurance was legislated by Congress for those with Adjusted Gross Incomes under $100k per year, removing even more of the disincentives. Still, the stigma lingered…
Lender Paid Mortgage Insurance
Meanwhile, lenders had tried building the MI premium into the interest rate as an alternative. This is called Lender-Paid Mortgage Insurance (LPMI). The way it works is that rather than having the borrower pay an MI company for an insurance policy, the lender boosts the interest rate from .375 to .75% and self insures for the loss. This makes MI disappear as a separate charge, but of course the loan interest rate is substantially higher.
Now however, lenders have begun to tier the LPMI premium according to risk, much as we do with interest rates. So a person with a high credit score may pay less than someone with a low one.
Case Study
I recently had a client with 10% down who was quoted traditional MI by another lender. With credit scores over 740, I was able to offer him a 30 year fixed rate mortgage with LPMI at the normal 30 yr rate. How? The adjustment to the rate was only .25 point to the Fee, nothing to the interest rate. He got the same rate he’d have gotten with 20% down, had no MI, and saved $224 per month in payment!
Can your lender do this? Does she even know it’s available? If you’re not working with experienced and knowledgeable, full-time professional who can give you this type of advice along with the best rates, and service, give me a call or email me. I’d love to help you with your mortgage.
October 6th, 2007 at 7:53 am
Just curious. When would PMI be better than the 80-10 type loans?
October 6th, 2007 at 8:04 am
Chris, back in days when we had rapid appreciation, a person with mortgage insurance could get that removed fairly quickly, effectively lowering their payment.
The 2nd loans, in those 1st/2nd combos, carry a higher rate. Sure, you can consolidate the 2 loans back into one loan if the home appreciated, but that would require refinancing and another set of fees.
Finally, what if rates were higher at the time and refinancing wouldn’t lower rates. Mortgage insurance in that example would have been a better choice.
October 6th, 2007 at 7:28 pm
I think the key element for all of us is a statement that you made in your article…”if you are not working with a full time professional…”
I’m amazed at the amount of people who list their homes with a part time agent and try to get loans with someone bartending on the side.
Let’s hope that in this age of transparency, the readers will soon determine that they need to have a FULL TIME PROFESSIONAL working on their behalf.
Great article.
- Gena Riede
October 8th, 2007 at 8:44 pm
Speaking from my 30 years of appraisal experience, I would like to caution homeowners to obtain written instructions from their lender before paying any fees to anyone, including an appraiser, for the purpose of having PMI removed. Most of the PMI removal guidelines that I have seen specifically state that any value appreciation must be attributable directly to physical improvements of the property; not solely to market appreciation. Of course, there are seasoning requirements, current payment status, etc., and many homeowners who purchased new homes a few years ago in the early stages of construction benefited from tremendous appreciation, but, were unable to have their PMI removed, even after seasoning, because they had not done a single thing to improve the physical characteristics of the property, i.e. landscaping, flatwork, irrigation, shutters, etc. I have often had homeowners fax me their lender letter before accepting a PMI removal appraisal assignment and I would council them on this matter so I wouldn’t be taking their money for an appraisal that they would not be able to use. This is an unusual appraisal assignment where the value is not the only important thing. How it got there is just as important with many lenders for the purpose of removing PMI. My advice: always check with the lender.
October 9th, 2007 at 9:50 am
Thanks for the comment Don. PMI won’t be going away anytime soon with the price declines we’re seeing in the region. Your advice is well taken however. It’s always a good idea to call the lender to clarify the rules.
October 9th, 2007 at 3:38 pm
Another appraiser here. Thanks for the comments Don & others. I did not realize that appreciation & 80% LTV may not be the only factor in removing PMI. I will be sure to carefully review the lender requirements prior to taking a PMI appraisal assignment.